Fitch Ratings-Hong Kong/London-26 January 2024: Prolonged war in Gaza and the related spread of conflict to nearby areas is adding to the risks facing neighbouring sovereigns, says Fitch Ratings. The intervention by Yemen’s Houthi forces has highlighted the potential for the conflict to increase headwinds to external finances, a challenge felt acutely in Egypt (B-/Stable), but also to a lesser extent in Jordan (BB-/Stable).
Strong growth in receipts from tourism and Suez Canal transits helped to narrow Egypt’s current-account deficit in the fiscal year ended June 2023 (FY23), with both rising more than 25%. Tourism earnings reached USD13.6 billion (around 3.5% of GDP), and canal-related receipts USD8.8 billion (2.2% of GDP), compared with a current-account deficit of USD4.7 billion.
The Gaza conflict and the Houthis’ disruption of canal traffic have curbed these earnings, adding to Egypt’s external financing challenges and downward pressure on its rating. Our baseline, which incorporates some hit from the war in Gaza, sees tourism and canal earnings of USD12.7 billion and USD9 billion, respectively, in FY24, but if disruption is sustained throughout 1H24, we estimate those could fall to around USD11 billion and USD7.5 billion, respectively, widening the current-account deficit to 3.5% of GDP, from our baseline of 2.7%. Intensified or broadened conflict could result in even worse outcomes.
Foreign exchange shortages recently led JP Morgan to exclude Egypt from its benchmark Government Bond Index-Emerging Markets (GBI-EM) index. We believe this could add USD1 billion-2 billion to the country’s external financing requirement in 2024 due to associated outflows.
These trends have put added pressure on Egypt’s currency, with the parallel rate reaching about EGP60/USD1 recently, further complicating the task of liberalising the official exchange rate, which stood at EGP30.9/USD1 on 19 January. We believe exchange rate reform remains key to unlocking IMF funding, which in turn could catalyse other financing.
Foreign partners may be willing to increase support for Egypt in response to conflict-related fallout, and its IMF programme could be enlarged. However, the government faces increased debt maturities this year of USD8.8 billion, from USD4.3 billion in FY23, and delays in the distribution of funding support could result in significant erosion of Egypt’s official reserve buffers.
Jordan’s sizeable current-account deficit relative to its rating peers is a credit weakness, though its external position is much stronger than Egypt’s, with risks being mitigated by resilient international support and adequate international reserves. In our November 2023 rating review, we projected the conflict would contribute to a wider current-account deficit of 7% of GDP in 2024, from a projected 5.3% in 2023, mostly through the impact on tourism. Although tourism earnings could be supported by the resilience of arrivals from the Middle East (over 70% of visitors), we expect lower European and American arrivals. Jordan’s ongoing efforts to diversify its trade routes beyond the Red Sea should help to reduce risks to its goods exports and imports, and we do not anticipate Jordan’s energy, water or food supplies will be significantly affected.
If the conflict broadens further, or is sustained beyond 1H24, risks to Jordan’s economic growth and fiscal consolidation would also increase. The 2024 current-account deficit could be moderately wider than 7% of GDP, but the new USD1.2 billion IMF Extended Fund Facility (approved in early 2024), should mitigate external financing risks and support reform momentum and investor confidence.
We expect Jordan’s external financing position and external buffers to remain consistent with its latest rating, bolstered by a record of strong support from bilateral and multilateral financing partners through several external shocks over the past decade and a half. The government anticipates foreign assistance commitments of USD3.5 billion in 2024 (around 9.1% of GDP).
LINK: Broader Gaza Conflict Fallout Adds to Regional External Finance Headwinds (fitchratings.com)
