Lost in the Pyramids

Written by William Lemanske

Author

William Lemanske
November 07, 2023 • Estimated Reading Time: 10 minutes

Where Did Egypt's Money Go?

Date: November 4, 2023

By: William Lemanske

 

Challenges and Developments in Egypt

 Egypt, a country rich in history and culture, is currently facing a series of significant challenges and opportunities that are shaping its future. This essay will delve into various aspects of Egypt's current situation, including the struggles of its new capital building, the economic implications of the second Suez Canal development, the importance of the Nile River and Delta, the Grand Ethiopian Renaissance Dam, the upcoming presidential election, and the role of the Egyptian General Petroleum Corporation.

 One of the foremost challenges Egypt faces is the development of its new capital building, which is struggling to take off. The estimated cost of Phase 1 development stands at a staggering $51 billion. This monumental project is essential for Egypt's future as it aims to create a modern and sustainable capital city.

 In recent years, Egypt has made substantial investments in its infrastructure, such as the second Suez Canal development, which incurred a cost of nearly $9 billion. This investment has paid off, as the annual revenue from the canal reached $9.4 billion in 2023, marking a significant increase from the previous year's $7 billion. This revenue surge is a testament to Egypt's strategic location as a vital international trade hub.

 Egypt's heavy reliance on the Nile River cannot be overstated, as 90% of the country's water supply originates from this source. Furthermore, the Nile Delta plays a crucial role in Egypt's agriculture sector, which is the backbone of its economy. Unfortunately, the rising sea levels in the Mediterranean have caused significant damage to this region, with approximately 15% of farmland being adversely affected. Addressing this environmental issue is paramount to preserving Egypt's agricultural productivity.

 Another major regional development is the Grand Ethiopian Renaissance Dam (GERD), a hydropower facility that generates substantial energy for Ethiopia. This dam is significant for Ethiopia's economic ambitions, aiming to transform it into a major energy exporter. However, the speed at which the dam has been filled has raised concerns in both Sudan and Egypt, as it threatens their water supply. Negotiations and cooperation among these countries are crucial to finding a sustainable solution to this pressing issue.

 Egypt's political landscape also deserves attention. Abdel Fattah El-Sisi, the current President, assumed office in 2014, winning the election with an overwhelming 91% of the vote. His tenure has seen both challenges and achievements, and the upcoming Egyptian presidential election scheduled for February 2024 will be closely watched for its potential impact on the country's future.

The Egyptian General Petroleum Corporation stands as a key player in the nation's economy. As a state-owned company, it is one of the largest in Egypt. Its role in managing the country's oil and gas resources has far-reaching implications for Egypt's economic stability and energy security.

Egypt is facing a complex array of challenges and opportunities, from the ambitious capital city project and the economic benefits of the Suez Canal to the environmental threats posed by rising sea levels in the Nile Delta and the implications of the Grand Ethiopian Renaissance Dam. The upcoming presidential election and the role of the Egyptian General Petroleum Corporation add further layers of complexity to Egypt's current situation. How the country navigates these challenges and seizes its opportunities will shape its future in the years to come.

Egyptian age group: (2023 est.)

0-14 years: 34.37% (male 19,381,371/female 18,271,080)

15-64 years: 60.27% (male 33,921,778/female 32,102,087)

65 years and over: 5.36% (male 2,976,765/female 2,893,639)

 

2023 population pyramid:

Egypt's Economic Challenges and International Relations 

Egypt is currently grappling with pressing economic challenges and international relations issues, each with significant implications:

1. In 2017, China abruptly withdrew from Egypt's ambitious new capital project, valued at a substantial $3 billion. This move dealt a severe blow to Egypt's modernization aspirations and raised questions about its ability to attract and retain foreign investment for major development initiatives.

2. Two years earlier, in 2015, the United Arab Emirates (UAE) abruptly halted negotiations on a vital capital development project. The details and potential benefits of this project were considerable, making the UAE's decision a considerable setback to Egypt's economic growth plans. It underscores the challenges Egypt faces in securing international partnerships for its ambitious projects. 

3. Egypt currently finds itself in the unenviable position of being the second most likely country to default on its financial obligations, with Ukraine leading the list. This ranking reflects Egypt's precarious financial situation, characterized by high debt levels, economic instability, and external pressures. Addressing these issues is critical to avoid the severe consequences of a potential default on Egypt's economy.

 These developments underscore the urgent need for Egypt to diversify its economic sources and engage in responsible fiscal management. As Egypt navigates these challenges, it must chart a path toward economic stability and sustainable growth, both domestically and in its international relations. The decisions made in response to these challenges will shape Egypt's future on the global stage. 

Analyzing its Credit Rating and Investment Outlook

 Egypt, one of the most historically significant nations in the world, is currently grappling with one of its most severe economic crises in decades. A detailed examination of key economic indicators reveals a disconcerting landscape, characterized by unsustainable debt levels, soaring inflation, dwindling foreign reserves, and sluggish economic growth. Years of external borrowing have culminated in a daunting repayment schedule for Egypt's substantial foreign debt. This analysis delves into Egypt's economic challenges, its recent credit rating downgrade, the implications this downgrade holds for investors, and the country's outlook for the future.

 Economic Challenges

One of Egypt's foremost economic challenges lies in its mounting debt burden. The debt-to-GDP ratio has surged to approximately 90%, a significant increase from the 70% recorded in 2016, surpassing the average debt levels seen in emerging markets. Currently, Egypt bears a total external debt of approximately $125 billion, which has raised concerns about the nation's ability to service its obligations.

Egypt's debt to GDP:

Moreover, Egypt's foreign currency reserves have witnessed a dramatic decline, shrinking from $45 billion in 2020 to a mere $33 billion. This leaves the country with less than six months of import coverage, well below the recommended levels for economic stability.

Inflation has soared to over 36% as of September 2023, exceeding the central bank's target range. Such high inflation rates exert significant pressure on both consumers and businesses, leading to increased costs and eroding purchasing power.

Annual Urban Inflation in Egypt: 

Furthermore, the Egyptian pound has experienced a depreciation of over 50% against the US dollar since March 2022. Despite three devaluations, the currency's value continues to decline, adding to the country's economic woes.

Lastly, Egypt's economic growth has been stagnant, with the International Monetary Fund (IMF) estimating a GDP growth rate of only 3-4% for 2022/23, down from pre-pandemic levels of over 5%. Key sectors like tourism and manufacturing have been severely impacted.

 

Credit Rating Downgrade

 The gravity of Egypt's economic predicament is underscored by the recent downgrade of its credit rating by Fitch to B-, a classification that falls two notches into junk territory. This downgrade highlights the mounting risk of default due to external financing pressures, placing Egypt on par with countries like Nigeria and Bolivia, far below the investment-grade category. This move by Fitch comes after a previous downgrade to B+ in April, reflecting growing concerns about Egypt's unsustainable deficits and debt trajectory, given the constraints in securing financing.

 

Implications for Investors

 Investors now face a challenging environment in Egypt because of the credit rating downgrade. This will inevitably raise Egypt's borrowing costs and constrain its access to capital markets. Bond yields have surged to over 15%, reflecting investors' demand for a high-risk premium. Notably, Egypt's dollar bonds have been among the worst performers in emerging markets for 2022, signaling high volatility in the months ahead. Additionally, without access to international markets, the risk of default increases, making it imperative for Egypt to secure an agreement with the IMF.

 

Outlook

 In the short term, Egypt's economic outlook appears negative, given the current instability and delays in implementing much-needed reforms. However, the long-term prospects could improve if Egypt successfully secures support from the IMF and implements essential economic reforms, such as adopting a flexible exchange rate.

 The upcoming elections present a challenge, as they may incentivize policymakers to postpone necessary reforms to avoid short-term political backlash. Nevertheless, these reforms are crucial to restoring Egypt's economic health and regaining investor confidence. With responsible fiscal and monetary policies in place, Egypt has the potential to gradually regain access to international capital markets.

 

Conclusion

 Egypt faces formidable economic challenges in both the short and long term. In the short term, the credit rating downgrade and current economic instability present hurdles that may deter investors. However, it also presents a unique opportunity for investors with a higher risk tolerance who can potentially find value in assets at lower prices.

Looking to the long term, Egypt has the potential to improve its economic prospects significantly. By securing support from the IMF and implementing essential reforms, such as adopting a flexible exchange rate, the country can gradually rebuild its economic stability. While the journey may be arduous, it offers investors the prospect of participating in Egypt's resurgence as it emerges from this crisis stronger and more resilient. Long-term investors with patience and a belief in Egypt's potential may find this period of turmoil as an opportunity to position themselves for future growth and prosperity in this historically rich nation.

 

Sources:

 

 

Reply

or to participate.