Economists are growing increasingly worried about pressures on Egypt as the country endures an acute food crisis. Though the IMF managing director Kristalina Georgieva says the government is taking the need for financial stability “very seriously”, this may not save external bonds or the Egyptian pound from severe drops, and some analysts fear a debt restructuring may be necessary.
Egypt is the world’s largest importer of wheat, as it does not produce anywhere enough grains to meet domestic demand. The outbreak of the Russia-Ukraine conflict was therefore disastrous — not only because of the sudden surge in prices, but also because the two countries at war provided around 85% of Egypt’s wheat.
Faced with suddenly growing external imbalances, the government first devalued the pound by 10%, and then approached the IMF for a potential programme in March.
However, James Swanston at Capital Economics warned on Monday that the “remarkable” stability of the pound since the devaluation suggests that the authorities were “heavily managing” the nominal exchange rate. This could prompt a “fresh build-up of external imbalances and the need for further disorderly falls in the currency down the line”.
Patrick Curran, senior economist at Tellimer Research, echoed Capital Economics’ point that “continued exchange rate flexibility” will be key. Yet though Curran called the IMF talks an “encouraging development”, he highlighted that the “margin for error is small” and believes “there is a risk the IMF may view debt as unsustainable and push for restructuring”.
Curran said that his firm’s concerns were heightened by perceived “increased concerns by the Fund about debt sustainability risks and emphasis on private sector involvement in debt restructurings”.
Secondary market prices suggest that bond investors — having driven a strong rally during March in the wake of Egypt’s IMF approach — are losing optimism. Egypt’s 2032s dropped to below 75 cents on the dollar on Friday — 15 points below their March 31 peak and the lowest level since IMF talks were revealed in early March. They now yield almost 12%.
However, this is still some way from fully pricing in a restructuring, and Matías Montes at EMFI Securities highlighted that “external liquidity ratios remain under control despite the weaker macro of the past few months”.