Not too long ago, Egypt was held up as a model country for Nigeria after its bold economic reforms in 2016 made the Arab world’s most populous country the darling of investors.
Egypt’s daring market reforms remain a good example that Nigeria can follow; however, the former has undone the gains of those reforms by lavishing hard-earned cash, or in this case “hard-borrowed cash” on megaprojects from a new capital city to presidential palaces that have not delivered economic gains.
The spending spree, financed mainly by foreign loans, now puts Egypt at risk of a rare bond default.
“Egypt’s case shows reform is not enough, if it is not complemented by purposeful leadership,” an economist familiar with the matter said.
Moody’s downgraded Egypt’s credit rating last week to ‘Caa1’, one of the lowest rungs of speculative grade, from ‘B3’, citing the country’s worsening debt affordability.
“Moody’s expects the materialisation of asset sale proceeds at the central bank to help restore the economy’s foreign currency liquidity buffer,” the credit rating agency said, placing Egypt’s outlook at ‘stable’.
The country’s dollar bonds slumped after the downgrade and were among the biggest losers across emerging markets on Friday, falling even deeper into distressed territory.
Yields on Egyptian Eurobonds maturing in 2025 were as high as 23 percent Monday compared to the 10.5 percent yield on Nigeria’s 2025 bonds.
“Clearly, the market is worried that Egypt might not repay but not worried about Nigeria,” an investment analyst told BusinessDay.
Egypt’s long walk to crisis
Egypt has been facing an economic crisis with record inflation and a chronic foreign currency shortage after the borrowing spree over the last eight years made external debt repayments increasingly difficult.
Egypt’s annual inflation rate hit a new record high of 39.7 percent in August with the main drivers — grains, meat, poultry, fish and fruit — rising by over 70 percent compared to the same month last year.
The surge is compounded by acute shortages of foreign currency and successive devaluation of the local currency.
Egypt has been mired in a foreign currency crisis since Russia’s full-scale invasion in Ukraine in February last year sent commodity prices soaring and prompted foreign debt investors to pull $20 billion from the country in a flight to safety.
The Egyptian pound has lost more than 50 percent of its value against the dollar since the Russia-Ukraine war.
To ease the shortage of foreign currency, Egypt has imposed import restrictions and at least two national banks have suspended the use of Egyptian pound debit cards outside the country to stop a drain on foreign currency.
The country is now targeting some $1.9 billion revenue from asset sales in a bid to raise foreign currency to shore up its pound, which has been under pressure for more than a year.
The sell-off, which includes stakes in oil companies and historic hotels, is part of an ambitious plan to raise billions of dollars by privatising 32 state-owned companies, a move announced in February that stalled amid reported disagreements with Gulf investors over the price of the assets.
Read also: IMF teaches Central Banks on managing inflation expectations
Egypt wasn’t always the basket case it is today.
In 2016, the country’s move to float the pound and cut energy subsidies was lauded home and abroad by economists who saw the move paving the way for investment inflows and economic growth.
While the reforms initially led to a painful surge in inflation and rising poverty, Egyptians took solace in long-term gains of the reform.
The gains seemed to have arrived when inflation started trending downwards and investment inflows poured in.
The reforms, which saw Egypt clinch a much-needed $12 billion support from the International Monetary Fund, also led to some currency stability.
Those gains have however proved short-lived with Egypt facing its worst crisis in more than a decade.
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