Egypt's gross external debt fell by marginal 1.3% q/q to USD 155.7bn as of end-June, edging down to 32.6% of full-year GDP compared to 33.0% as of end-March, according to preliminary data released by the central bank (CBE). The q/q drop was entirely due to falling stock of long-term debt, while short-term debt held relatively steady on the quarter after USD 13bn worth of GCC deposits were made with the CBE in March. The banks' external debt position actually rose on the quarter, driven by short-term debt (+ USD 0.5bn q/q). We remind the banks absorbed most of the blows from the March/Apr 2020 sell-off and the Feb/March 2022 sell-off (the latter is estimated to have resulted in USD 17bn capital outflow). Following the COVID shock, the banks turned to borrowing from international development and commercial banks in order to diversify their funding mix, with a focus on longer tenors to lengthen their maturity profile and we expect foreign borrowing to increase again in 2022. About 65% of the banks' external debt is long-term, which reduces short-term refinancing risks. Conversely, the long-term external debt of the government fell by USD 0.9bn q/q, and the non-banking private sector's exposure to non-resident creditors fell by USD 0.5mn on the quarter.
External debt service was USD 12.6bn in H1 (rising sharp 56% on the year), with principal repayments of USD 10.0bn and interest payments of USD 2.5bn. While we haven't seen any official comments on the GCC deposits that are due in the current fiscal year, we believe (and so do most analysts) these deposits will be either rolled over (this applies to the medium term deposits that were made several years ago), or converted into longer term investments (this mostly applies to the USD 13bn worth of one-year deposits made in Mar 2022). Thus, we do not expect to see capital outflows due to maturing GCC deposits in 2022/23. Recently, FinMin Maait said Egypt faces USD 16bn in external debt payments over the next four years, but he was confident Egypt will fill the fiscal gap with FDIs, IMF funding, which in turn is expected to unlock USD 9bn financing from multilateral and bilateral partners.
Public debt has risen sharply since the start of the pandemic due to Eurobond sales (a total of USD 11.8bn), and USD 8.0bn emergency financing from the IMF, in addition to USD 5.2bn SBA. Following Russia's invasion of Ukraine, Egypt has reached out to the IMF for new talks that include financing component and the two parties reached staff-level agreement for USD 3bn EFF in late October. Egypt promised to switch to a more flexible FX rate regime in order to avoid a buildup of external imbalances and said it remained committed to its fiscal consolidation reform program.
When classified by original maturity, the bulk of Egypt's external debt (83%) is medium- and long-term, and about half of it is owed to multilateral institutions. We remind strong portfolio investment flows into T-bills helped stabilize FX reserves since June 2020, but made the economy more vulnerable to the March 2022 sell-off that followed Russia's invasion of Ukraine. The external debt of the central government was USD 82.3bn or 53% of total debt and 17.2% of full-year GDP as of end-June and is entirely in the medium- and long-term category. The short term external debt, which is mostly extended to private sector and the CBE, accounted for 80% of net international reserves as of end-June, indicating a sharp deterioration when compared to 34% a year earlier.