Egypt: Egypt’s Net Foreign Asset Turns Negative

Central Bank of Egypt data showed that its net foreign asset (NFA) position decreased a sharp $13.7 billion to negative $5.1 billion – a net foreign liability position- amid non-resident capital outflows triggered by the Russian invasion of Ukraine.

In a new commentary, Moody’s said capital outflows are credit negative for the Government of Egypt, whose liquid foreign exchange reserve buffer is highly correlated with the central bank’s NFA position.

With liquid foreign exchange reserves that printed at $29 billion at the end of March, a similar drawdown of $13.7 billion would reduce the reserve stock to around $15 billion, according to Moody’s.

The global rating firm said that level would undermine external debt service coverage over the next 12 months, which Moody’s analysts estimate at about $30 billion.

The sum include $13 billion in short-term debt and $17 billion in medium/long-term maturities in fiscal 2022 ending 30 June.In recent weeks, Gulf Cooperation Council (GCC) oil-exporting sovereigns have collectively made $22 billion of financial commitments to Egypt.

Saudi Arabia made a $5 billion foreign currency deposit to directly buttress Egypt’s foreign exchange reserves, in addition to another $10 billion earmarked for investments.

Qatar pledged $5 billion in investments, while the United Arab Emirates committed $2 billion of investments. Netting out the $5 billion direct deposit from Saudi Arabia would limit the prospective FX reserve drawdown to about $20 billion.

The Central Bank’s 21 March decision to hike the policy rate 100 basis points and allow the currency to depreciate about 15% helps dampen capital outflows and safeguard the economy’s foreign exchange reserves.

On the fiscal side, the government’s $7 billion or 1.7% of GDP support package provides targeted income support measures to mitigate the fallout from higher food and energy prices without reinstating broad subsidies.

“It is a response that reflects the government’s improved policy effectiveness, which supports Egypt’s credit profile. The government has also officially requested an IMF program. We expect it will help fund the wider current account deficit, which we estimate at 5.4% of GDP in fiscal 2022, versus 4.6% in fiscal 2021.

Notwithstanding Egypt’s already large borrowings from the IMF at about $19 billion, Moody’s expects that the government will be able to access additional funding under the IMF’s Exceptional Access.

Although GCC sovereigns’ financial commitments and the prospect of a new IMF program mitigate Egypt’s immediate balance of payment risks, the sovereign’s growth model, which is based on an open capital account and significant non-resident investor participation in the domestic debt market, increases the economy’s exposure to external shocks.

Moody’s said volatile and pro-cyclical capital flows amplify the domestic market effects of tightening global funding conditions. The firm said higher exposure to nonresident creditors increases external vulnerability risks unless it is backed by a commensurate foreign exchange reserve buffer.