It has been a tumultuous year in the global debt markets as central banks around the world have aggressively raised interest rates in response to the largest wave of inflation since the 1970s. Reacting to price growth spurred by Russia’s invasion of Ukraine in February and the impact of the covid-19 pandemic, the US Federal Reserve embarked on its fastest tightening cycle in years, triggering a historic sell-off in Western bond markets, capital flight from emerging markets, and a record-breaking USD bull-run.

It was no different in Egypt: The Central Bank of Egypt has been forced to adopt one of the most aggressive policy stances due to a shortage of foreign currency and resulting pressure on the EGP. Policymakers have hiked key rates by 800 bps this year, taking them back to where they were in early 2019.

Rising rates abroad + global uncertainty triggered major outflows from Egypt and other emerging markets: Foreign investors pulled USD 21 bn of investment from Egyptian assets during FY 2021-2022, according to the central bank (pdf), which attributed the “mass exodus” to monetary tightening by the Federal Reserve. In the t-bill market alone, foreign holdings fell 67% during the first nine months of 2022 to USD 6.7 bn by the end of September, according to in-house calculations of central bank figures (pdf). The loss of portfolio flows has deprived the country of one of its most important sources of hard currency, tightening FX liquidity, and putting pressure on the currency.

Global tightening has all but shut Egypt out of the international debt markets: The government hasn’t taken any new eurobond issuances to market this year due to the high yields demanded by foreign investors. Egyptian bonds have traded in distressed territory this year — defined as bonds with yields trading 10% higher than US treasuries — a warning sign that indicates a rising risk of default.

What a difference a year makes: Contrast this with 2021 when Egyptian sovereign debt was in high demand among foreign investors. Last year the government sold USD 6.75 bn in USD-denominated eurobonds across two issuances.

This has prompted the government to look to other sources of foreign funding, including successfully closing its maiden Samurai bond issuance with the sale of USD 500 mn (c.JPY 60 bn) of JPY-denominated bonds in Japan back in March. The Finance Ministry could pull the trigger on our long-awaited maiden sukuk issuance and a sale of so-called panda bonds in China next year, with a USD 500 mn issuance of CNY-denominated bonds planned for 1Q 2023 and a USD 1.5-2.5 bn sale of shariah-compliant securities before the end of the fiscal year in June.

Foreign debt has continued to rise this year: Egypt added another USD 17.8 bn to its external debt pile during the previous fiscal year, raising total external debt by 13% to USD 155.7 bn in the year to June 2022.

On the positive side: Solid economic growth has kept external debt-to-GDP at an even keel, falling slightly to 32.6% at the end of FY 2021-2022 from 34.2% a year earlier. That said, the first six months of the year has seen the figure tick up from 30.5% at the end of 2021. Long-term debt also accounted for 82.9% of total foreign debt: Out of the USD 155.7 bn owed at the end of FY 2021-2022, USD 129.1 bn was long-term debt.

Total debt levels? That’s tough to ascertain, considering the government stopped publishing regular domestic debt figures from the beginning of FY 2020-2021. We know that total debt-to-GDP declined to 87.2% by June 2022 from 90.6% a year earlier but the total volume of debt is unknown. The government wants to bring down the debt-to-GDP ratio to 84% by June 2023 and 75% by FY 2025-2026.

Debt servicing costs have climbed: Rising debt levels, higher rates at home and abroad, and the impact of the surging greenback has caused the government’s interest payments to rise significantly this year. External debt servicing climbed 56% y-o-y to USD 12.57 bn during the first six months of 2022. Interest paid on total government debt rose 35% to EGP 216.4 bn in the first quarter of FY 2022-2023, mainly due to rising borrowing costs of domestic debt. This is almost double the pace expected in the budget which forecast debt servicing costs to rise 19% during the current fiscal year.

Development loans continued their upward trajectory in 2022, rising to USD 14 bn from USD 10.2 bn the year before and USD 9.8 bn in 2020, the International Cooperation Ministry said last week. State-led development projects received USD 11 bn from multilateral and bilateral lenders during the year while the private sector obtained USD 3 bn.