US$13 billion in Gulf deposits allays some pressure on Egypt following capital flight from emerging markets
 
 
The headquarters of Egypt's Central Bank are seen in downtown Cairo, Egypt January 11, 2018. Picture taken January 11, 2018. REUTERS/Mohamed Abd El Ghany
 

Last week, the Central Bank of Egypt announced that it had obtained US$13 billion in deposits from countries in the Gulf over the first three months of 2022. The figures were recorded in its External Position of the Egyptian Economy Report for the period between June 2021 and March 2022, which it published several months past its due date.

The Gulf deposits acted to bolster stocks of foreign currency that were heavily depleted over the past year.

In comparison to the same period last year, balance sheets at the central bank were boosted by inflows from tourism, which rallied as the world readjusted from the worst of the coronavirus pandemic according to the quarterly report, and income from Egypt’s petroleum exports soared. Yet the import bill drained currency from the country due to high global inflation, and bearish global markets saw foreign investors take flight from the bond market, prompting speculation in the global press about the potential, though still unlikely, of Egypt defaulting on due payments.

And, according to economic analyst Amr Adly, while the Gulf money allows Egypt to retain solvency on the global stage, it fails to address the long-term issues that make Egypt vulnerable to external creditors. 

The foreign investor exit, which has affected Egypt and other emerging markets, turned net inflows of $16 billion in Egypt’s debt markets from July 2020 to March 2021 to a net exit of 17.2 billion from July 2021 to March 2022, according to the report, with the greatest proportion of the funds leaving the country between January and March 2022.

Tourist inflows revived, however, to reduce some of the pressure on the current account. From July 2021 through March 2022, Egypt made $8.2 billion in revenues from tourism, compared to just $3.2 billion the previous year due to the sharp impact on the sector wrought by the pandemic. Revenue from commodities exports also jumped 57.8 percent to reach $32.5 billion, a major portion of which was due to a huge leap — 120.4 percent — in exports of petroleum and its derivatives to reach $13.1 billion. As a result, the petroleum sector made net profits of almost $4.1 billion, up from $174.9 million between July 2020 and March 2021.

Foreign direct investment in non-oil sectors also rose to a record $9 billion, $4.6 billion of which was injected into the economy during the first three months of 2022. Yet the bulk of that investment, around $2.6 billion, went to increase the capital of existing companies, or in buy-ups, whereas new investments represented only $208.2 million.

Revenue from the sale of businesses and productive assets to non-residents increased by $2.2 billion to reach $2.3 billion, and net inflows for real estate sold to non-residents reached $643.5 million.

Increased foreign currency inflows, however, were matched by growing demands on the current account, as the import bill expanded between July 2021 and March 2022 to reach $66 billion as a result of soaring global inflation. 

Despite the fact that around 34.3 percent of imports between July 2021 and March 2022 were components for industry, and a further 11.3 percent were raw materials, new import regulations introduced in the first quarter of 2022 acted somewhat to constrict the passage of goods into the country and to bolster liquidity, as a central bank official telling the domestic press that the new system had seen $11.6 billion deposited in the national banking system since its April implementation.

But the greatest boost for the forex reserves came in the new $13 billion in Gulf deposits, added to an existing $15 billion already in the central bank. Contributions to the central bank from the UAE, Saudi Arabia, Kuwait and most recently Qatar now amount to $28 billion, or 75.5 percent of the $37 billion total foreign currency reserves recorded at the end of March, according to central bank figures.

That’s in comparison to the end of 2021, when non-resident investments in Egypt’s bond market — denominated in dollars, euros and Egyptian pounds — represented about $28.8 billion, or 56 percent of the foreign exchange reserves and other foreign exchange assets held by the central bank, according to Fitch.

The $13 billion Egypt obtained since January is made up of short-term deposits to the value of $5 billion from the United Arab Emirates, $5 billion from Saudi Arabia, and $3 billion from Qatar. The report did not specify precisely when repayments will be due.

The existing set of deposits, which have long and medium-term maturities, include $5.6 billion from the UAE, $5.3 billion from Saudi Arabia and $4 billion from Kuwait. Egypt was due to pay back $2 billion of the Kuwaiti deposit in April, and the remainder in September, while two installments are due to be repaid to the UAE this year worth a total of $1.5 billion.

Extra support from the Gulf comes after Egypt’s Finance Minister Mohamed Maiet expressed regret earlier this year for the country’s fiscal dependence on hot money inflows to the debt market to stabilize forex reserves, as he told journalists at a July presser that, “we learned our lesson.”

The political interest that Gulf countries have in shoring up Egypt’s security is a part of a geopolitical dynamic that, economic analyst Amr Adly told Mada Masr, means that “at least that they, unlike other foreign creditors, won’t pull out their investments overnight.” Yet a level of external vulnerability remains. 

As Mada Masr has reported previously, in both 2015 and more recently, funding from countries in the Gulf has been tied to political conditions, while analysts speaking to Reuters have noted that Gulf countries seem to be toughening conditions by seeking hard assets in addition to central bank deposits.“Ultimately, the share of foreign creditors in the country’s foreign currency reserves remains almost the same, it’s only the identity of the creditors that has changed,” said Adly.

The Gulf deposits also undermine another of Egypt’s policy targets. Maiet hoped in February that Egypt would attract investments with longer maturities, over three years in length, in order to “ease pressure on the public treasury.” However, the new deposits from the Gulf all mature in the short-term.

The proportion of short-term debt, which places greater pressure on an economy’s balance of payments, increased year on year to reach about US$26.4 billion, or 16.7 percent of total external debt, according to the central bank report, and doubled in terms of its ratio to the net foreign reserves from 33.8 percent at the end of June 2021 to 71.3 percent at the end of March 2022.

Total external debt rose in total by $19.9 billion to reach $157.8 billion in March 2022. The central bank stated that the external position remains within “manageable” limits, since debt to GDP averaged 34.6 percent, and 86 percent of the external debt comprised debt with long-term maturities. 

Of this, around $52 billion is owed to multilateral institutions, and of that, around 44.7 percent is owed to the IMF alone, with another $11.8 billion owed to the World Bank’s International Bank for Reconstruction and Development; $4.7 billion to the European Investment Bank; 3.1 billion to the African Export-Import Bank; and $2.7 billion to the African Development Bank.

Concerns were circulated in the media after it emerged that Egypt committed to repaying $33 billion in foreign debt — an amount that would deplete the foreign reserves almost entirely — over the 12 months between March 2022 and March 2023, as per a report released by the World Bank at the beginning of July. In a recent television appearance, the finance minister affirmed that Egypt will be able to repay its external commitments this year.

Funds are also expected to be incoming from ongoing negotiations with the IMF, with sources and the latest predictions anticipating Egypt will receive a loan worth around $3 billion. Adly notes that the extra support from the Gulf also means Egypt has, “a more solid position in the IMF negotiations.”

But six years after the first IMF deal, which brought with it a wave of austerity as part of a set of liberal policy conditions, Adly suggests that similar structural problems persist. “Here we are: back to square one,” he said. “The IMF terms should have helped, for one part, with alleviating overall dependency on foreign debt. Instead, they keep on deepening it.” 

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Mohamed Ezz 
Mohamed Ezz, an Egyptian photographer and engineer, born in Cairo, Egypt where he currently works. He originally graduated from the Faculty of Engineering, Cairo University in 2007.
 
 

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