Egypt has invested heavily in massive infrastructure projects in recent years, including the new capital east of Cairo and widespread road construction, which helped maintain economic activity during the COVID-19 pandemic. However, this has weakened the investment environment, stifling industrial and agricultural projects and relying on hot money, creating some instability in the Egyptian economy in 2022.
The instability could have disappeared or increased over time without defined moments, but the Russian-Ukrainian conflict ignited the situation and has brought the economic situation to light causing huge difficulties and forcing the Egyptian government to struggle to control the exchange rate of the Egyptian pound against the US dollar, leaving the Egyptian government struggling to keep afloat amidst the overwhelming debt that has grown heavier in last 10 years.
With inflation spiraling, American interest rates rising, ongoing geopolitical disturbances, and structural economic challenges, the Egyptian pound and other regional currencies may face further declines in 2023. Therefore, 2023 may be a defining year for the Egyptian state to chart its destiny for years to come.
Eye on the crisis
The Egyptian pound has declined in value in three stages. The first was in March 2022, when it dropped from 15.7 to 18.2 pounds per dollar. The second was in October 2022, when it reached 23 pounds per dollar, with the central bank announcing a flexible exchange rate policy. The third was in January 2023, when the pound plummeted to a record level of over 32 pounds before stabilizing at around 30 pounds currently.
Egypt has been struggling with foreign currency since the outbreak of the Russian-Ukrainian war in February 2022 and the rise in US interest rates throughout 2022, resulting in the exit of over 22 billion dollars in hot foreign investments in debt instruments.
The financial statement for the state’s 2022/2023 general budget project revealed that the total payment of local and foreign debts will amount to 690 billion pounds, representing 7.6% of the total domestic output and an increase of 19.1% over the previous budget. Since October, the Egyptian currency has been depreciating, and the government is facing the challenge of finding sustainable solutions to tackle rising product prices and potential political instability.
Facing the beast
The Egyptian government has faced a challenge and changed some of its important financial leadership, such as replacing Tarek Amer as the governor of the central bank with Hassan Abdullah and appointing Rami Aldekani instead of Mohamed Omran. Since then, the government’s management has improved significantly, despite it not being clear to the Egyptian citizen.
On January 11, 2023, the Egyptian Central Bank succeeded in obtaining a loan from the International Monetary Fund by committing to stringent reform conditions, such as its commitment to maintain a constant exchange rate for the local currency against receiving a loan from the International Monetary Fund worth 3 billion dollars for 46 months. On the same day, the Central Bank announced the exchange rate, and the pound fell to its lowest level ever, 32.5 for the dollar in state-owned banks, close to its price in the black market.
The decision by the head of the Egyptian Central Bank was made due to the observation of four unauthorized practices in the foreign currency market in December 2022 that drained the Egyptian economy. These practices included the use of credit cards abroad to take advantage of currency differences, trading some goods in the local market with hard currency, and violations related to the transfer of money from Egyptians abroad through unofficial channels to take advantage of the unofficial exchange rate. The fourth violation was the establishment of illegal foreign currency trading offices. These practices were negatively affecting the Egyptian economy, and the Central Bank’s decision was aimed at stopping them.
The stock market as a lifeline for the Egyptian Economy
The Egyptian government has taken the reins to revive its stock market and turn it into a safe haven for investors. Along with maintaining a stable exchange rate, the government has also committed to gradually selling some of its state-owned assets, including those owned by the military, to regional and international investors to provide more freedom for the private sector and attract investors back. It has also agreed to increased supervision from the International Monetary Fund on its national budget, state-owned companies, and government spending, in an attempt to control the value of the Egyptian pound.
The government aims to raise 2.5 billion dollars by the mid-year from these sales, covering sectors such as energy, industry, and transportation. Despite the Egyptian stock market being in its worst state in recent years, it has now started to bounce back with the new economic administration. The EGX30, the main stock index in Egypt, has risen by 22.17% in 2022, reaching its highest level since 2017 and adding another 9.51% this year, surpassing 17,000 historical points.
In 2023, there is a high number of companies set to be listed on the Egyptian stock market, attracting Arab and foreign investment, supported by strong performance in the last quarter of 2022 and the first months of 2023. This is just the beginning of a promising future for the Egyptian stock market as a hub for investment.
Sovereign funds as a new player
Egyptian sovereign funds have emerged as a new player in the economy. Failure is the last thing the Egyptian government needs right now, and it seems that the new economic team understands this and will rely on the Arab player in the coming period, specifically the massive financial capabilities and meeting of expectations of the Egyptian Sovereign Fund.
The fund was able to attract investment worth $3.3 billion from Arab and Gulf sovereign funds in 2022, with some in dollars and others in Egyptian pounds, in sectors such as tourism, real estate, industry, financial services, education, and manufacturing. Additionally, the Saudi Sovereign Wealth Fund is in advanced talks to acquire the state-owned Unified Bank of Egypt in a deal worth approximately $600 million, with more companies on the way in the next four years with a total value of around $40 billion.
The acquisition of the investment will take place through the newly established Egyptian-Saudi Investment Company, valued at a whopping $620 billion. This move is a testament to the Egyptian economic team’s understanding of the challenges they face and their determination to find solutions that benefit everyone involved. The vision of Saudi Arabia to transform its oil-based economy aligns with the Egyptian government’s effort to sell some assets to finance exchange rate fluctuations. This agreement is reflected daily in the Egyptian stock market and will become more evident as the government’s initiatives begin this year.
Credit rating downgrades send shockwaves again
Moody’s has announced a decrease in Egypt’s credit rating from B2 to B3, dashing hopes for a brighter future. This may hamper Egypt’s efforts and make it more difficult to issue more bonds, which the government had relied on to fund Egypt’s external debt of 155 billion dollars by September 2022. The Egyptian government will now have to either raise interest rates or resort to alternative means of funding the debt.
The current situation in Egypt’s economy is better than it has been in the past and the production sector has started to recover to its full capacity. This will help stabilize the prices of all products in the near future. However, Moody’s report is based on data from before the new economic administration took over. Standard & Poor’s has already given Egypt a B rating with a stable outlook, which shows that the current situation is under control.
Nevertheless, these reports emphasize the importance of the stock exchange’s initiatives to improve the Egyptian economy and the Egyptian stock exchange, which is expected to see higher values for its companies in the future. The question remains whether Rami Dakkani and Hassan Abdullah will be able to prevent the Egyptian pound from further depreciation. With their economic performance during the storm, it seems that they are up to the challenge of steering the Egyptian pound to calmer waters.