Egypt the Rage in North Africa Anger Bout

The Cairo Stock Exchange has advanced this year more than 5% in USD terms on the MSCI Index, while neighbors Morocco and Tunisia are off 1.25% and 2.35%, respectively.  Foreign investment in Egypt’s local debt is at a record high of USD 28.5 billion, according to the Finance Ministry, on high real interest rates, after rebounding sharply from the USD 17.5 billion in outflows at the start of the pandemic a year ago. Further inflows are likely as Euroclear is expected to settle local debt purchases later this year and in anticipation of inclusion in the JPMorgan EM GBI. Investors cite progress in reforms made since the 2016 devaluation and IMF program, with the Institute for International Finance noting recently that economic growth will continue to be supported by appropriate fiscal and monetary policy. Egypt successfully completed its USD 12 billion, 3-year IMF program in 2019. Last year it accessed an additional USD 2.77 billion to combat the impact of the pandemic which caused tourism revenues to slump some 70% and foreign direct investment to fall by one-third from a year earlier. In June the IMF approved a one-year USD 5.2 billion standby loan.  

Foreign investors however have missed some critical warning signs in their search for return.  The country’s debt/GDP level is at 90% while the fiscal deficit doubled in the July-September quarter over the same period in 2019.  On the African continent, Eurobonds/GDP is the highest historically at 10%, with Egypt the largest issuer with USD 38.9 billion outstanding, according to IIF data. In addition to accessing IMF support, in the past year it has come to market with Eurobonds three times. It launched the region’s first green bond and most recently sold USD 3.75 billion in USD Eurobonds in 3-tranches, including USD 1.5 billion in 40-year bonds at 7.5%, with the order book almost 5-times oversubscribed.

The stock market, meanwhile, which lost 25% in 2020 in USD terms, is anticipating a re-opening of the IPO pipeline after a 2-year drought. Last year as interest rates fell companies tapped the bond market, offering both securitized paper and inaugural Islamic sukuks. Public and state-owned companies, including Banque du Caire, are in line to come to market, as investors await the launch of the government’s latest privatization program announced three years ago.  The EGX has also announced plans to launch a new SME Index, while plans for a commodity exchange are also moving ahead.

The Casablanca Stock Exchange, which lost just a little over 1% last year due to a late year rebound, is falling this year on a combination of profit-taking in large caps and worry about the banking sector with the most actively traded shares. Investors expect lower dividend payments and are monitoring both domestic and sub-Saharan exposure. At the same time, investors have welcomed a partnership between the IFC and Moroccan Capital Markets Authority to improve the market’s ESG standards and align the ESG disclosure regulatory framework with international best practice.  On the bond side, despite Moody’s downgrading its outlook to negative on the sovereign’s Ba1 rating, Morocco’s local debt was added to the Bloomberg African Bond Index, which is expected to draw fresh interest as the economy recovers. 

In North Africa, Morocco has the lowest government debt/GDP level at 75%, of which only one-fifth is in foreign currencies.  At the same time, foreign reserves are up 25% from a year earlier and January remittances were 8.8% higher than the same month a year ago.  Morocco drew down the full amount of its USD 3 billion IMF Precautionary and Liquidity Line during the height of the pandemic and raised the same amount in a Eurobond that was more than 4x-oversubscribed.  Nonetheless, the economy contracted 6.8% in 2020, with a second year of drought compounding the impact of the pandemic. At the end of the Trump Administration the Kingdom struck a deal for diplomatic recognition of its decades-long Western Sahara claim in return for Israel outreach. The move invited future fishing and phosphate prospects, but raised border tensions with Algeria under its own troubled transition.  

Finally in the region, Tunisia, the first “Arab Spring” country a decade ago, was a top performing market in 2020, up 12% in dollar terms. The stock market’s top regional performance was in stark contrast with its economic output which contracted 8.2%. While the country was able to access USD 745 million in emergency Covid assistance from the IMF, a broader program has still not been agreed.  The IMF is insisting on cutting the public wage bill which amounts to 17.6% of GDP and subsidies as debt/GDP heads to 90%, of which 65% is in foreign currencies, while the fiscal deficit hit 11.5% of GDP. State-owned enterprise debt totals 40% of GDP. In the first month of the year external debt service surged 27% compared to the same month a year earlier while tourism revenues plunged by more than half. Although higher than last January, foreign reserves cover less than 3 months of imports.

Late last month Moody’s downgraded the sovereign’s rating to B3 and maintained a negative outlook, citing “weak governance.” The IMF is predicting economic expansion of 3.8% this year but stressed “considerable” downside risks to the projection.  Much slower growth is more likely as Tunisians are again on the streets protesting unemployment and lack of prospects. Nearly one-third of university graduates are unemployed, and the overall unemployment rate is over 17%. In 2020 more than 12,000 Tunisians risked their lives crossing the Mediterranean by boat seeking a better life.

The IMF has broadly warned that MENA risks another “lost decade,” noting that the region took much longer than emerging market peers to regain previous levels of growth after the Global Financial Crisis.  Among the North African countries, Tunisia is clearly the most at risk of debt distress while neighboring Morocco is expected to rebound with lower overall debt but another year of drought would weigh on output. Egypt, currently an EM bright spot, will rebound and attract portfolio investment but high debt levels and stalled reform – along with human rights concerns – may deter inflows in the months to come.  Progress with the long-delayed privatization program would be welcome by overseas buyers, but local investment could again be deterred as social unrest would likely escalate with state enterprise sell-offs and an ensuing spike in job losses and harsh security crackdown in another vicious cycle.

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