Government spending and investment will weaken given higher financial costs and looming devaluation
Given higher borrowing costs and record-high inflation, multinationals should anticipate weaker government and business demand in 2024. Expect and plan for deferred payments and growing pressure for price reductions and increased flexibility on payment terms. Multinationals should further anticipate the extension of project timelines as Egypt works to preserve FX resources, an effort that will continue to create import difficulties through 2024. B2G and B2B players should seek opportunities in strategic sectors such as energy and hospitality, which will remain resilient in 2024, while emphasizing cost-saving solutions and value-added services to better position products vis-à-vis competitors.
Overview
- Yields on Egyptian T-bills have risen from 1.7% in August 2022 to 4.0% in August 2023, with the interest rate on the instruments exceeding 25% for the first time. The government estimates that each 1% increase in the treasury yield adds EGP 36 billion to the budget deficit.
- With the Central Bank of Egypt (CBE) having raised lending rates by 1,100 basis points since 2022, more than 56% of spending in the FY 2023/2024 budget has been allocated to loan repayment and servicing. Principal and interest payments on debt will represent more than 100% of budgeted revenues for FY 2023/2024.
- Gross debt was 96% of GDP at the close of the FY 2022/2023 in June 2023, up from 90% one year previously. The government’s large and rapid buildup of local currency debts has spurred an increase of 31.9% YOY in M1 money supply as of May 2023, fueling very high inflation. Inflation has broken multiple all-time records in Summer 2023, closing July at 36.5% YOY.
- Counting SOEs and economic agencies, public investment fell from EGP 1.1 trillion in FY 2022/2023 to EGP 1.0 trillion in FY 2023/2024, with the government prioritizing projects that are above 70% completion. Policymakers are channeling public investment to sectors capable of generating significant inflows of FX income, including tourism and upstream oil & gas.
- The Egyptian pound (EGP) continues to come under severe pressure, with parallel market rates indicating that the current exchange rate of EGP 30.9: USD 1 overvalues the pound by around 40%.
- Although some sources of FX income, such as tourism and the Suez Canal, have performed strongly in 2023, other FX generators have stuttered. This comes as Egypt faces around US$ 50.3 billion in external debt servicing and payments during H2 2023 and 2024.
Our View
FrontierView sees real growth in government spending slowing from 4.9% in 2022 to 2.5% in 2023 and 3.1% in 2024, as higher interest rates pressure government finances through the medium term. Further cuts to public investment are likely in 2024 as the government seeks to conserve FX resources and new currency devaluations keep inflation at very high levels, spurring policymakers to introduce new household support measures.
New devaluations will put further pressure on government finances in 2024. FrontierView sees the CBE allowing the pound to depreciate from its current rate of EGP 30.9: USD 1 to a rate of EGP 36: USD 1 in Q3 2023, before allowing a further drop to EGP 41: USD 1 by the year’s end. Egypt’s government is a large importer of commodities such as wheat. With its revenues booked predominantly in Egyptian pounds, the heavy depreciation of the currency since 2022 has significantly raised the government’s import expenses in local currency terms.
Some measures the government has taken to spur greater private investment may impact the profitability of Egypt’s SOE sector and thus the government’s revenues. These include the phaseout of VAT and customs exemptions for a large swath of companies in the SOE sector. Meanwhile, the government has made tentative progress on the divestment program it launched in 2022, announcing in July 2023 that it had concluded asset sales worth a combined US$ 1.9 billion and is in negotiation for a further US$ 1.0 billion in transactions. However, interest in Egyptian assets from foreign investors has been significantly cooler than expected, reflecting the uncertain exchange rate picture.
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