Investors and analysts warn that Tunisia and Egypt are on the verge of major debt crises, which could engulf a volatile North African region and force wealthy Gulf Arab neighbors to make a choice.
Tunisia’s political crisis and food shortages have been exacerbated by President Kais Saied’s consolidation of power and crackdown on opponents.
Egypt, the largest economy and most populous country in North Africa, has long been thought to be too big to fail, but Tunisia, the birthplace of the Arab Spring, is also significant.
Tunisians’ hopes for a long-awaited International Monetary Fund (IMF) assistance package remain alive, but political divisions cast doubt on the IMF’s commitment.
President Saied has slammed the IMF, claiming that Tunisia will not comply with its “diktats” on food and energy subsidy cuts, as well as public wage bill reductions, which could cause social unrest.
“Given the current political climate, you have to wonder whether an IMF program would even survive a first or second review,” said Matt Vogel of FIM Partners, an emerging and frontier market asset manager.
Without sustained IMF assistance, the country faces a full-fledged balance of payments crisis.
JPMorgan forecasts a 5% fiscal deficit due to one of the world’s highest public sector wage bills, while Morgan Stanley warns that FX reserves will not cover two months of basic imports by next year.
Egypt’s finances remain at risk
It is possible that debt repayment will be impossible. In October and February, the country must repay two 500 million euro foreign loans.
“There is always the risk that the IMF programme will be delayed for so long that when it comes, it will be too little, too late,” said Matt Robinson, senior sovereign analyst at Moody’s.
Despite a $3 billion IMF rescue plan in December, Egypt’s finances remain precarious.
According to Fitch, the government’s debt interest payments, a large portion of which is borrowed in dollars, euros, or yen, will consume more than half of its revenues next year as its debt-to-GDP ratio approaches 100% and three major currency devaluations totaling 50% in less than a year.
Only defaulting Sri Lanka would pay more, according to the rating agency, which downgraded Egypt’s credit rating again on Friday. The lack of dollars in Cairo’s local currency markets is harming the economy.
Despite repeated devaluations and interest rates as high as 18.25%, the Egyptian pound now trades at more than 40 to the dollar, nearly 25% lower than its official rate.
Many economists believe they will need to go higher, complicating the economic narrative for next year’s presidential election.
“Up until the pandemic, there had been a marginal improvement in living standards for the population,” said Chatham House Associate Fellow David Butter.
“However, we have returned to this cycle of exchange rate volatility and soaring inflation since late 2021.”
The government of President Abdel Fattah al-Sisi denies a default and plans to sell $2 billion in state-owned assets by June to close funding gaps.
The risks of Egypt collapsing too great to take
The IMF expects selloffs to cover half of Egypt’s $17 billion funding gap over the next four years, and Gulf allies Saudi Arabia, the United Arab Emirates, and Qatar have historically bailed out the country.
Analysts blame their tougher stance on friendly politics and disagreements over asset valuations.
During a recent visit to London, UAE Economy Minister Abdullah bin Touq Al Marri told Reuters that “the UAE and Egypt will always stand together” and that infrastructure funding exemplified their “very deep” and “very dynamic” relationship.
This year, Egypt’s nearly $30 billion in international bonds fell 20%, causing regular asset managers to suffer.
Next year, Cairo will pay $5.8 billion in “principal” and “coupon” bond payments, carrying a 2% “weight” in the world’s most closely followed emerging market debt index. Suez Canal and tourism revenue are both increasing.
Carl Ross, an EM crisis veteran at fund manager GMO, said wealthy Gulf states would have to weigh the cost of supporting Egypt against the risk of regional instability if a 110 million-person nation collapsed.
Ross stated that “it would not be insignificant” if global money managers defaulted.
“These very wealthy Gulf countries have generally enhanced financial stability in the region,” he said, referring to their assistance. “No one knows how long this will last or under what circumstances.”
