Back to the complete issue
Tuesday, 25 May 2021

Egypt among the most vulnerable EMs to higher refinancing costs –S&P

Egypt, South Africa, Ghana and Kenya are the four emerging markets that could suffer the most from higher sovereign debt refinancing rates, S&P Global Research said yesterday. The ratings agency ran stress scenarios to gauge the effect that rapidly rising borrowing costs for sovereigns would have on budget deficits, looking at scenarios where refinancing rates rose by 100 bps, 200 bps, and 300 bps.

In a “rate shock” scenario where refinancing rates rose 300 bps, Egypt’s interest expenditure as a ratio of GDP would rise 1.2 percentage points (ppt) in the first year. This is slightly lower than the 1.3 ppt increase S&P sees South Africa facing in this scenario, and higher than the 0.9 ppt increase Ghana and Kenya would face. According to the ratings agency, Egypt, India, and Nigeria’s debt service payments already exceed 30% of state revenues in calendar year 2021 — without any changes in current refinancing costs. In the draft state budget for the upcoming fiscal year, Egypt’s Finance Ministry said it expects debt service costs to account for nearly a third of overall government spending.

Part of the problem is the fact that Egypt has a “relatively sizable” portion of its sovereign debt in FX, which complicates its ability to control financing costs, S&P says. Colombia, Ghana, Kenya, Turkey, and Ukraine are also in the same boat as Egypt. On the opposite end of the spectrum, Brazil, China, India, South Korea, the Philippines, and South Africa have greater control over their financing costs because they “finance themselves almost exclusively in local currency.”

The shock isn’t a certainty, however, and depends largely on why rates end up rising: “If rates rise quickly to reflect rapid employment gains and buoyant GDP growth, against the backdrop of steady increases in productivity, the higher cost of debt servicing will almost certainly be offset by improving state revenue and more rapid consolidation of the primary (non-interest) government accounts,” S&P says. The risk scenario is if rates jump because of a “delayed” response from central banks tightening their monetary policy to face inflation as a result of stagnant post-covid productivity. In this scenario, interest rate shocks might be even more severe, resulting in a scenario where “growth would falter, exchange rates weaken, and credit fundamentals suffer.”

Enterprise is a daily publication of Enterprise Ventures LLC, an Egyptian limited liability company (commercial register 83594), and a subsidiary of Inktank Communications. Summaries are intended for guidance only and are provided on an as-is basis; kindly refer to the source article in its original language prior to undertaking any action. Neither Enterprise Ventures nor its staff assume any responsibility or liability for the accuracy of the information contained in this publication, whether in the form of summaries or analysis. © 2022 Enterprise Ventures LLC.

Enterprise is available without charge thanks to the generous support of HSBC Egypt (tax ID: 204-901-715), the leading corporate and retail lender in Egypt; EFG Hermes (tax ID: 200-178-385), the leading financial services corporation in frontier emerging markets; SODIC (tax ID: 212-168-002), a leading Egyptian real estate developer; SomaBay (tax ID: 204-903-300), our Red Sea holiday partner; Infinity (tax ID: 474-939-359), the ultimate way to power cities, industries, and homes directly from nature right here in Egypt; CIRA (tax ID: 200-069-608), the leading providers of K-12 and higher level education in Egypt; Orascom Construction (tax ID: 229-988-806), the leading construction and engineering company building infrastructure in Egypt and abroad; Moharram & Partners (tax ID: 616-112-459), the leading public policy and government affairs partner; Palm Hills Developments (tax ID: 432-737-014), a leading developer of commercial and residential properties; Mashreq (tax ID: 204-898-862), the MENA region’s leading homegrown personal and digital bank; Industrial Development Group (IDG) (tax ID:266-965-253), the leading builder of industrial parks in Egypt; Hassan Allam Properties (tax ID:  553-096-567), one of Egypt’s most prominent and leading builders; and Saleh, Barsoum & Abdel Aziz (tax ID: 220-002-827), the leading audit, tax and accounting firm in Egypt.