[Economics] Egypt and Tunisia... a possible slip into a debt spiral

[SnO]

Investors and analysts are sounding the alarm that Tunisia and Egypt are on the verge of a major debt crisis that could affect the troubled North African region and present the Gulf states with difficult choices.

Both countries are already facing several challenges due to shortages of basic commodities and disruptions in financial markets. Tunisia is also witnessing a political crisis caused by President Kais Saied's tightening of his grip on power and the suppression of opponents.

 

 

 

 

There is a long-held belief that Egypt is too big to collapse, the largest economy in North Africa and the most populous. But Tunisia is also of great importance as the cradle of the Arab Spring and is supposed to be the only success story of the uprisings in the region.

Tunisia case
Tunisia remains hopeful of long-awaited support from the International Monetary Fund, although concerns remain about its commitment to any program given the political divide.

Qais Saeed criticized the IMF, saying that Tunisia would not submit to what he described as dictates to cut food and energy subsidies and the public sector wage bill, warning that this could lead to renewed social unrest.

"Given current policies, we have to ask whether any IMF program will survive the first or second review," said Matt Vogel, director of emerging markets assets at FIM Partners.

But without sustainable assistance from the Fund, the country will face a comprehensive balance of payments crisis, according to observers.

Tunisia pays one of the highest public sector wage bills in the world, which means that the fiscal deficit will remain at around 5% of GDP, according to JPMorgan estimates.

Meanwhile, Morgan Stanley warns that foreign exchange reserves will not be enough to cover commodity imports for two months, even this time next year, given the current rate of withdrawal from those reserves.

Paying off debt can become an almost impossible task. Most of the country's loans are domestic, but it has to repay a foreign loan of 500 million euros next October, and then repay another next February.

"There is always the possibility that the IMF program will be delayed for so long that when it comes it will be too little too late," warns senior analyst at Moody's credit rating agency Matt Robinson.

On the risk of default, Robinson said, "It could happen eventually. That's what our low rating indicates."

Egypt will sell electricity abroad at a low price for hard currency - Correspondent's photo
The pound lost 50% after devaluing it 3 times in about a year (Al-Jazeera)
What about Egypt?
Egypt's public finances are under pressure, despite the agreement on a $3 billion bailout program with the IMF last December.

The debt-to-GDP ratio is rapidly approaching 100%, at a time when the pound has lost 50% after devaluing it 3 times in about a year, which means that interest payments on debt alone - a large part of which is borrowed in dollars, euros or yen - will be swallowed up. More than half of government revenues next year, according to Fitch.

Fitch downgraded Egypt's credit rating again last Friday. A shortage of dollars in local currency markets is badly hurting the economy.

The dollar is now trading at more than 40 pounds on the parallel market, about 25% higher than the official exchange rate for the dollar, despite repeated devaluations of the local currency and interest rates that have jumped to 18.25%.

Many economists believe that interest rates will rise much higher than this level, all in support of a controversial economic vision ahead of next year's presidential elections.

“For the population, in the period up until the outbreak of the pandemic there was a marginal improvement in living standards,” said David Butter, associate fellow in the Middle East and North Africa Program at the London-based think tank Chatham House.

"But since late 2021, we have returned to this spiral of instability in the exchange market and runaway inflation," he added.

President Abdel Fattah al-Sisi's government denies any talk of default. In order to bridge financing gaps, it aims to sell state-owned assets worth $2 billion by the end of next June.

This is a very important step both for the IMF, which expects the sale to cover nearly half of the $17 billion financing gap over the next four years, and for the allied Gulf states that have supported the country with plenty of money.

Those countries are now taking a tougher line, which analysts attributed to regional politics and differences over the valuation of assets to be sold, despite some positive rhetoric.

 

Egypt's foreign debt to Egypt exceeded 106 billion dollars
Central Bank of Egypt (Al Jazeera)
Big consequences
For asset managers, there has been a painful 20% drop in the value of Egyptian international bonds, which are close to $30 billion this year.

Suez Canal and tourism revenues are improving, but Cairo must repay $5.8 billion in principal and interest on bonds next year, at a time when those bonds account for a 2 percent weight in the most watched emerging market debt index.

Carl Ross, an expert in emerging market crises at GMO Asset Management, says that the Gulf states will have to balance the cost of supporting Egypt with the risks of regional instability in the event of the collapse of the country of 110 million people.

 

 

https://www.aljazeera.net/ebusiness/2023/5/12/مصر-وتونس-انزلاق-محتمل-نحو-دوامة