Alarm as debt crises loom in North Africa
Tunisia and Egypt are edging closer to major debt crises, that could suck in a volatile North Africa region and pose tough choices for wealthy Gulf Arab neighbours, investors and analysts warn.
The countries have shortages of essential goods and financial market dysfunction. In Tunisia, President Kais Saied’s consolidation of power and crackdown on opponents has sparked a political crisis.
Egypt, as North Africa’s largest economy and most populous country, has long been thought too big to be allowed to fail, but Tunisia too carries outsize significance as the birthplace — and supposed sole success story — of the Arab Spring.
Tunis’s hopes for longawaited IMF support still flicker, despite concern that it would stick to a programme, given its fractured politics.
Saied has criticised the IMF, saying Tunisia will not bow to its “diktats” on food and energy subsidy cuts and a reduction in the public wage bill, warning it could fuel renewed social upheaval.
“Given the current politics, you have to question whether an IMF programme would even survive a first or second review,” said Matt Vogel, at emerging and frontier market asset manager FIM Partners.
Without sustained IMF help, though, the country faces a balance of payments crisis.
One of the world’s highest public sector wage bills means its fiscal deficit will remain about 5% of GDP, JPMorgan estimates, while Morgan Stanley warns foreign exchange reserves will not even cover two months’ basic imports this time next year at their present rate of attrition.
Repaying debt could become almost impossible. Most of the country’s borrowings are domestic, but it has a €500m foreign loan repayment in October followed by another in February next year.
“There is always a risk that the IMF programme is delayed for such a long time that when it comes it is too little, too late,” said Matt Robinson, a senior sovereign analyst at credit ratings agency Moody’s.
Egypt’s finances also look stretched despite it securing a $3bn IMF rescue plan in December. Its debt-to-GDP ratio is fast approaching 100% and three major currency devaluations totalling 50% in little over a year means the interest payments on its debt alone — a large slab of which is borrowed in dollars, euros or yen — will soak up more than half of the government’s revenues next year according to Fitch.
The ratings agency, which downgraded Egypt’s credit rating again last Friday, highlights that only default-stricken Sri Lanka will need to pay more. And like that example, a lack of dollars in Cairo’s local currency markets is biting the economy.
The Egyptian pound now changes hands at more than 38 to the dollar on the streets, nearly 20% below the currency’s official rate despite the repeated devaluations and interest rates jumping to 18.25%.
“For the population, up until the pandemic, there had been a marginal improvement in living standards,” said David Butter, an associate fellow on Londonbased think-tank Chatham House’s Middle East and North Africa Programme.
“But since late 2021, we have gone back into this cycle of instability on the exchange rate market and soaring inflation.”
President Abdel Fattah alSisi’s government has rubbished talk of a default and to help plug the funding holes is targeting $2bn worth of state-owned asset sales by end-June.
Whether that is achieved will be crucial, both for the IMF which expects selloffs to cover about half of Egypt’s $17bn funding gap over the next four years, and for Gulf allies Saudi Arabia, the United Arab Emirates and Qatar that have traditionally bailed the country out.
They are now taking a tougher stance, which analysts put down to neighbourly politics and differences over valuations of the assets to be sold, though positive noises are still being made.
UAE economy minister Abdulla bin Touq Al Marri said on a recent trip to London that, “the UAE and Egypt will always stand together” adding that infrastructure funding showed the relationship between the two was “very deep” and “very dynamic”.