Rising global debt: all-time high of $184tn challenges world, Egypt no exception

THE STATE OF THE WORLD’S GOVERNMENT DEBT

Global debt has been on the rising tide in the recent year, worldwide debt reached a record high of $184tn, almost 225% of global GDP in 2017, the International Monetary Fund has announced.

The US,China,and Japan are leading the world’s borrowers list, accounting for more than half the global debt, significantly greater than their share of global output.

In Egypt’s case, however, over the next three years, the government’s net debt is projected to decline from 100.3% of the GDP in fiscal year (FY) 2017/18 to 89.6% of the GDP in FY 2020/21, according to Pharos. Pharos believe the decline in debt will rely on three main factors:

First is the continuing fiscal consolidation, as the primary balance turns positive, the accumulation of debt would decelerate, leading the debt ratio (as % of the GDP) to decrease.

Second, is the shift toward external debt,as Egypt’s Ministry of Finance has been shifting towards the less costly source of financing through increasing the portion of external debt, while decreasing the domestic debt contribution. Consequently, going forward, Pharos expect the external debt to increase from 37% of the GDP in FY 2017/18 to 38.1% of the GDP in FY 2020/21, in light of the latest steps of the economic reform programme.

Finally, favourable debt dynamics will ease the pressure—apart from the fiscal policy stance,and the overall supportive macroeconomic environment in Egypt over the next three years— and would also help reduce the debt ratio. Pharos estimate the real effective interest rate on local currency debt to remain below the real GDP growth rate over the forecast horizon.

Accordingly, the nominal GDP growth rate would exceed the net government debt growth rate, leading the debt ratio to go downwards.

In December, Fitch, the global credit rating agency, issued a report citing their forecast that Egypt’s fiscal debt is narrowing to 6.4% of the GDP by FY 2019/20, down from 9.4% in FY 2017/18 supported by robust economic growth and fiscal reforms.

Fitch believe that the biggest risk to Egypt’s fiscal consolidation is the country’s debt composition and short debt maturity schedule, as the country’s debt maturity schedule is relatively short, heightening rollover risks.

Additionally, Fitch indicates that 50.0% of the debt is set to mature by end-2020, and in an environment of tightening global financing conditions, this could leave the country more exposed to a jump in borrowing costs.