Reasons to be cheerful? Cairo certainly hopes so

At first glance a near-overnight 10 percent decline in your currency versus the US dollar and a similar fall in a stock exchange benchmark is not a great result.

Egypt has had a lot to contend with since Covid and Russia’s invasion of Ukraine. Notably, the efforts of Houthi rebels in Yemen against international shipping have curtailed Suez Canal revenues while fighting in neighbouring Gaza has provided (at best) two years of unwelcome headlines.

My colleague Valentina Pasquali outlined Egypt’s familiar problems around gas shortages (which should not exist) and a debt burden of over $160 billion.

And now the US-Israeli war with Iran is adding further pressure in the form of likely lower tourism numbers and depressed remittances.

President Abdel Fattah El Sisi has acknowledged as much. He said at the weekend that cumulatively Egypt has lost $10 billion in Suez Canal receipts since the start of the decade.

“Since 2020 onwards, Egypt has faced crises and negative developments that were difficult to avoid … which undoubtedly had an impact on the state’s ability to act,” Sisi said.

The news is bad but the candour is welcome.

Economists say the managed depreciation of the pound – rather than defending a peg as was the practice for decades – is the right way to go.

After all, before February 28, things had been looking up. Our columnist Matein Khalid had described Egypt’s “post 2024 policy cocktail” as a “fabulous success”. Matein dug up the old “Tiger on the Nile” appellation of the 1990s when Egypt had an investment-grade credit rating.

Egypt, along with everyone else, will be hoping the conflict with Iran is a short one. The prize of less regional destabilisation by the current regime in Tehran is worth a lot to Cairo. Egypt will book it as a major gain if the Houthis remain uninclined to back their Iranian allies and permanently desist from attacks on shipping in the Bab al Mandab.

Further reading:

• How Egypt’s economy is exposed by the Iran war
• Opinion: Egypt is the new Arab tiger
• Egypt puts global bond issue on hold during Iran conflict

And Cairo can still point to many positives – certainly in contrast to the unremitting negatives pre-2024.

The country has not been directly hit by Iran, which should boost tourism once the fighting is over.

In the year to date, the EGX30 is up 10 percent in local currency terms and flat in dollar terms. On a 12-month horizon, the index is up over 40 percent in both local currency and the dollar.

This month’s depreciation has enabled Cairo to protect its foreign exchange reserves, which are approaching a hefty $53 billion. Remittances last year were a record $41.5 billion and will bounce back.

Fitch said on Monday that Egyptian banks should be resilient to the effects of the Iran conflict, depending on duration.

The government has sensibly raised highly sensitive gasoline prices, although oil at $100 a barrel means there is still a significant subsidy strain.

Certainly, the currency depreciation has caused certain traders to exit Egyptian carry trade and sovereign bond prices have fallen 7 percent since the start of the war. Moreover, the inflationary effects of higher oil prices and fuel price hikes mean interest rate cuts are off the table and increases may be coming.

But it could be worse.