Citigroup Inc. is turning bullish on Egypt’s dollar debt, arguing that the North African nation will obtain access to financing as it’s seen as too important geopolitically to be allowed to fail.
That will support the bonds of the most populous Arab nation as it grapples with its worst economic crisis in years, Citigroup strategists said in a note. Sales of state assets are also picking up and the government may be on track to meet targets set by the International Monetary Fund, they said.
“While geopolitical risks are likely to weigh on the region in the coming months, in our view Egypt’s geostrategic position may reinforce its bargaining power with its multilateral and Gulf Cooperation Council creditors and catalyze increased new financing,” Citigroup strategists said in a research note released on Thursday.
Egypt’s geopolitical location could be leveraged to access further financing, the note explained, adding that the “Egypt sovereign risk sentiment might be at an inflection point”.
“We are seeing some positive momentum in the privatization process while official sector support might be ramped up given the geopolitical context,” Citigroup wrote, pointing out that the government’s sales of assets have seen a consistent uptick and that it seems to be on track to achieve the targets set by the International Monetary Fund. The note was referencing Egypt’s $3 billion loan from the IMF.
According to Bloomberg, Egyptian dollar debt recorded the best performance in the Middle East since the start of Israel’s campaign against Gaza on October 7th, noting that Jordanian bonds were among the biggest losers.
Egypt is currently in discussions to receive fresh funding from Gulf countries, according to several news outlets citing sources, which have stated that the Central Bank of Egypt is close to acquiring new deposits amounting to approximately $5 billion from Saudi Arabia and the UAE.
Earlier, Fitch Ratings said challenging outlooks for Egypt, Tunisia and Lebanon Of the 15 rated Middle East and North Africa (MENA) sovereigns, Egypt is on a Negative Outlook after a downgrade in May 2023 due to increased external financing risk.
In Fitch’s view, external financing risk has increased given high external financing requirements, constrained external financing conditions and the sensitivity of Egypt’s broader financing plan to investor sentiment. All this comes against a background of high uncertainty on the exchange-rate trajectory, and reduced external liquidity buffers.
Egypt targets a central state budget primary surplus of 1.5% of GDP in FY23 and 2.5% in FY24, from 1.3% in FY22, which we believe is credible partly based on the recent record of delivering consolidation plans.
“We expect inflation to support revenues while eroding spending in real terms, although scope for this will be limited by significant reductions in government spending/GDP since 2016, and increased social spending to protect population purchasing power. The government plans to offset the increased social spending with a strict policy on capex in FY23, and by accelerating efforts on revenue mobilisation in FY24,” Fitch said in a statement on its website.