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Egypt’s economy gets its mojo back

14 February 2025

 

Egypt’s economy is in stronger fettle than for at least a couple of years, and there is a sense of optimism about how things will transpire in 2025, even as recent pronouncements from the White House about Gaza weigh on policymakers in Cairo.

In a manifestation of that upbeat economic sentiment, Egypt in January staged a return to the international debt capital market for the first time in two years, with a $2bn issuance that was five-times oversubscribed. That was a straw in the wind that foreign investors’ concerns over the economy are finally abating.

After a battering inflicted on Egypt’s economy last year, when economic growth slipped to 2.4%, reflective of a weak currency, surging inflation and tougher public spending restrictions, analysts see a recovery in play that will drive stronger GDP growth in the coming year.

One key contributor to this improvement is the recovery in Suez Canal receipts, which dropped by about three-quarters last year after the Houthi attacks on shipping in the Red Sea. That loss of $7bn in revenues shaved off more than a percentage point from Egypt’s overall GDP growth rate, noted Moody’s Investors Service.

Growth dynamics are now improving, even if events in the region remain in flux. According to Capital Economics, there was a rise in real GDP growth to 3.5% in Q3 2024, up from 2.4% in Q2 2024. The manufacturing, transport and storage, and finance sectors were the key drivers of that improvement.

Egyptian banks are feeling the positive impact. Credit growth is reviving, with bank lending to the non-government sector growing by 2.9% in October 2024 – the fastest pace in two years.

Operating conditions for Egyptian lenders will continue improve in 2025, according to Fitch Ratings, underpinned by a sharp fall in inflation, along with an expected broadly stable currency, improved investor confidence and healthy foreign currency liquidity conditions. This should also support lower interest rates as inflation declines.

Foreign capital injection

Douglas Winslow, senior director at Fitch Ratings, says the improvement in market sentiment follows a combination of factors and is also seen in the return of non-resident inflows totalling more than $10bn into the domestic debt market since early last year.

Egypt's external finances have benefitted from Gulf state interventions, notably the UAE sovereign wealth fund ADQ’s major foreign investment in the Mediterranean resort of Ras El-Hekma, which was announced in 2024.

That deal injected $24bn of new foreign currency into Egypt, the remaining $11bn converting existing UAE foreign currency deposits held at the Central Bank of Egypt (CBE).

Saudi Arabia’s Public Investment Fund has also committed to invest $5bn in Egypt’s economy. 

Such investments, eased by the weaker Egyptian pound – rendering assets more affordable – will also help to address Egypt’s dollar shortages, and assuage residual investor concerns about default risk. 

“The huge Ras El-Hekma investment was a very important factor in the turnaround, and Fitch projects further foreign direct investment (FDI) of $7bn a year above the pre-ADQ position. The lion’s share of that is GCC investment,” says Winslow.

The $24bn of fresh foreign currency puts Egypt in a better place to move to a more flexible exchange rate. 

The combination of these factors has enabled a rapid rebuilding of Egypt’s external coffers, which was the key risk facing near-term external financing. Fitch forecasts FDI to average $16.5bn across the fiscal year ending June 2025 and fiscal year 2026, with new investment from Saudi Arabia having an impact.

Alongside the Gulf support has come multilateral financing, including from Europe. Since March 2024, an $8bn IMF Extended Fund Facility and a €7.4bn ($7.64bn) three-year EU support package have been unlocked.

Together, these capital injections will also help cover Egypt’s current account deficit, which widened to 5.4% of GDP in 2024. Inflation is also headed in the right direction, after reaching a peak of 36% in February 2024. The expectation is that inflation will have more than halved by the end of financial year 2025-26.

Strong growth upside

Looking ahead, the more optimistic prognosis foresees GDP growth accelerating to 5% in the current fiscal year. Others are more circumspect, noting the recent recovery in Suez Canal receipts is very partial and that the government still needs to implement structural economic reform measures.

Fitch Rating’s forecast for GDP growth is 4% for fiscal year 2025. A pickup in growth is already detectable.

“Growth was 3.5% in Q1 of the current fiscal year and we expect it accelerates to just above 5% in fiscal year 2026, close to our assessment of the potential and rate of the Egyptian economy. That’s partly due to further falling inflation and a positive impact on real income,” says Winslow.

Despite these stronger macro metrics, the wider credit assessment is still constrained, due to relatively weak external finances. While the central bank can call upon larger foreign exchange reserves to support the currency, Capital Economics has warned that a return to a heavily managed exchange rate would worry investors and may also call into question IMF and Gulf willingness to provide further financing.

“The IMF programme does contain some wider structural reform measures to improve private sector competitiveness, but in our view, they're not particularly far-reaching, and we're not seeing really sizeable momentum in terms of delivering in this area,” Winslow says.

There is a need for measures to stimulate private sector growth and also to improve the competitiveness of the economy, support the trade balance and reduce the current deficit over the medium term. 

“A better track record of ongoing political commitment to curbing off-budget spending pressures would also help Egypt’s rating,” says Winslow.

As to the potential for regional events to upset things, Egypt's credit fundamentals are at least better insulated from further geopolitical stress.

This, in turn, should give comfort to commercial banks in Egypt. Fitch upgraded the long-term issuer default ratings of all rated banks in November 2024, following the upgrade of Egypt’s sovereign rating.

There are other things that will need to be seen for the Egyptian economy’s recovery to sustain itself over the long-term.

“From a credit perspective, the composition of growth is equally important,” says Winslow.

“What we’ve seen in the past is that very large government off-budget megaprojects have not just led to weaker public finances, they've also contributed to external financing stress. So, what's particularly important is that the recent steps to try and better monitor and contain these off-budget infrastructure projects continues.”

MEED’s March special report on Egypt also includes:

> GOVERNMENT: Egypt is in the eye of Trump’s Gaza storm
> POWER & WATER: Egypt’s utility projects keep pace
> CONSTRUCTION: Coastal city scheme is a boon to Egypt construction

READ THE FEBRUARY MEED BUSINESS REVIEW

Trump unleashes tech opportunities; Doha achieves diplomatic prowess and economic resilience; GCC water developers eye uptick in award activity in 2025.

Published on 1 February 2025 and distributed to senior decision-makers in the region and around the world, the February MEED Business Review includes:

> WATER & WASTEWATER: Water projects require innovation
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James Gavin

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