The Central Bank of Egypt and the attempts to avoid the risk of bankruptcy (The New Arab)
Contrary to everything I’ve written about the Egyptian economy over the past ten months, the Bloomberg Economic Agency has ruled it out Egypt from the list of candidate countries for bankruptcy in the next period, using a risk model of my own design, and assuring them that the risks are concentrated in small economiesAnd that the major economies, which assumed Egypt would be among them, would remain immune Risk of failure.
The US agency attempted to set numerical values for bankruptcy risk in 41 emerging countries during the following twelve months, and only eleven countries achieved a bankruptcy probability greater than ten percent during the next period, and among these there is they were Argentina, Ecuador and Ethiopia..
The agency reassured its readers that the economies of these eleven countries combined represent no more than 3% of the total value of the global economy, which makes the occurrence of any failures in them completely independent of global markets.
The agency also indicated that some countries, such as Pakistan and Ghana (and I forgot Egypt), are currently seeking assistance from the International Monetary Fund, or have already gotten some of the assistance they need, to get out of their current crisis..
And during the year 2022, which saw the Federal Reserve Bank’s most violent tightening policy since the early 1980s, most emerging and developing countries experienced currency pressure, high borrowing costs and a domestic current account deficits have increased, and some of them have been forced to stop paying their external debt service obligations..
The Federal Reserve raised the interest rate on its funds in six consecutive meetings to within the 3.75% – 4% range after being close to zero earlier in the year.
Most expectations point to two more rate hikes at least during the next two meetings, until the interest rate on bank funds reaches at least 4.75%..
Although most of the central banks around the world have followed the example of the US Federal Reserve, many countries are currently exposed to serious risks, especially the emerging countries, due to what Bloomberg summarized in four main points, which ranked countries prone to bankruptcy according to their impact on each of them..
The agency said the first of these points concerns the increase in the debt-to-GDP ratio, in developing and emerging countries, to 67% on average this year, after having narrowly exceeded 50% in 2019.
The well-known Trading Economics website claims that this percentage will reach over 87% in Egypt by the end of this year, i.e. in about five weeks..
The second point is the increase in interest rates worldwide at an unprecedented rate in four decades, which according to the agency makes it more difficult to carry out debt service in those countries, especially for the debts those countries have obtained in foreign currencies.
External debt in Egypt has grown at an unprecedented rate, reaching $155.7 billion by the end of June this year, which is the latest figure announced by the Central Bank of Egypt, which represents nearly four times Egyptian exports..
While Egypt is estimated to have obtained several billion dollars in new loans from Saudi Arabia, Kuwait, Qatar and a few other international institutions over the past four months, during which the external debt payment has not been announced. , Egyptian bond prices in international markets reflect the rate of yield to maturity YTM extension exceeds 15%, according to the most reliable published data.
Bloomberg said the third point is related to the decline in those countries’ currencies against the dollar, which doubles the external debt service burden, noting that many of these currencies have depreciated against the dollar by more than 10% since early end of 2020.
According to data from the Central Bank of Egypt, the Egyptian pound has fallen against the dollar by more than 55% since last March, i.e. in a period of no more than eight months, while that percentage is sharply increasing in the parallel market..
The fourth point of the US agency’s report concerned the interest rates applied to the currencies of emerging and developing countries in the recent period, after their central banks were forced to raise interest rates, more than the Bank sometimes Federal has raised, to protect their local currencies, which naturally leads to pressure on the budgets of those countries, already in crisis. The average yield on treasury bills exceeded 18% in offers last week, according to data from the Egyptian Ministry of Finance%.
Although the data released by Egyptian official institutions and international institutions indicate the seriousness of the weakness of the Egyptian situation, according to the four indicators identified by the agency, Bloomberg said that the model it developed indicated that the probability of bankruptcy of Egypt does not exceed 6%. At the same time, however, the agency admitted that its “innovative” model did not take into account some considerations.
Bloomberg also indicated that the international bond markets reflect some differences from the results of its model, as the model showed more weakness than what was found in the bond markets of Latin American countries, as most of them usually suffer the deterioration of financial conditions in neighboring countries..
Concerning Egypt, the agency considered that international markets reflect worse conditions than achieved through the model used, but indicated that its other analyses, for each country separately, agree with the view that it expects that Egypt solve its problems by weakening its local currency, not ceasing to pay its foreign debts!
Contrary to the above, the agency indicated that most of these countries managed to accumulate foreign exchange reserves and that commodity exporters would benefit from the increase in their prices, but ignored that Egypt imports oil , wheat and barley and that Egypt’s foreign exchange reserves decreased by about 20% in the last nine months (currently only $33 billion), confirming that Egypt is a very special case.
