Macro Analysis /

Egypt Debt Monitor: External debt accumulation accelerates in Q3 18/19

    Al Ahly Pharos Securities Brokerage
    29 August 2019

    Egypt's external debt stood at US$106.2bn in Q3 18/19, up from US$96.6bn in Q2 18/19; growing by 9.9% qoq – the fastest since Q2 16/17. Annually, external debt grew 20.5% yoy in Q3 18/19, faster than the previous four quarters, where yoy growth averaged at 17.1%. 

    External debt fell slightly to 36% of GDP in Q3 18/19, from 37% of GDP in Q2 18/19 and down from its peak of 39% in Q4 17/18. Debt/GDP fell as nominal GDP grew faster.

    The rise in external debt in Q3 18/19 was mainly driven by a growth in the central government’s debt, at US$53.8bn in Q3 18/19 from US$48.0bn in Q2 18/19, as well as the growth in banks’ debt at US$10.1bn in Q3 from US$7.7bn in Q2. The two remaining borrowers, the CBE and other sectors, saw their debt level rather stable since Q1 18/19. 

    External debt ratios well within safe boundaries

    Short-term external debt to the total external debt rose to 11.7% in Q3 18/19 from 10.7% in Q2 18/19. However, the ratio fell from previous levels since the beginning of FY 18/19. The Guidotti-Greenspan rule states that a country should hold enough foreign currency reserves that cover its external liabilities due within a year – Egypt’s net international reserves to short-term external debt fell to 3.6 in Q3 from 4.1 in Q2. However, Egypt's short-term debt remains well covered with international reserves covering it three-fold continuously since 2017/18. 

    Debt service to the total account receipts dropped to 19.8% in Q3 from a high of 30.7% in Q2, both on the back of higher account receipts and lower quarterly debt service. 

    Government borrowing drives high and front-loaded debt service 

    External debt service reached US$3.0bn in Q3 18/19, down from US$5.0bn in Q2 18/19, of which US$947mn in interest payments while the remaining US$2.1bn went to principal payments. According to the government’s repayment plan, US$3.1bn in external debt service should be paid in Q4 18/19, leaving the highest payments to 2019/20 where US$10.7bn are due in H1 19/20 and US$5.9bn are due in H2 19/20. 

    International organisations remain the highest lenders and has been increasing over the past two years along with bonds and short-term debt, to represent together the bulk of external debt. This reflects the IMF loan’s size within the external debt profile and the government’s strategy to use its attractive real yields into capturing portfolio investments in treasury. Accordingly, the biggest borrower remains the central government. The CBE has seen its borrowings increase since the currency float in 2016. 

    The rise in borrowings of the private sector that has been gradually visible since 2016 suggest that growth, albeit slow, of a private sector-led economic activity, is picking up very slowly and will become more visible as rates decline going forward, which in turn will strengthen private investments' contribution to GDP.