Fitch Ratings said that the long war in Gaza and the associated spread of the conflict to neighboring regions increase the risks facing sovereign bonds in the region, especially in Egypt and Jordan.
The intervention of Houthi forces in Yemen has also highlighted the possibility that the repercussions of the conflict will develop in ways that are difficult to predict.
The agency noted that strong growth in tourism revenues and Suez Canal transit helped reduce Egypt's current account deficit in the fiscal year ending in June 2023 (FY23), as both rose by more than 25%.
Tourism revenues amounted to $13.6 billion (about 3.5% of GDP), and canal-related revenues were $8.8 billion (2.2% of GDP), compared to a current account deficit of US$4.7 billion.
The conflict in Gaza and the Houthis' disruption of traffic in the canal have limited foreign exchange sources, adding to the external financing challenges facing Egypt and the pressure due to the downgrade of its rating to “B-” with a stable outlook.
In the base scenario, which includes some damage from the war in Gaza, Fitch expects tourism and canal revenues to reach US$12.7 billion and $9 billion, respectively, in FY24, but if disruption continues throughout the first half of 2024, it id estimated that these revenues could fall to about $11 billion and $7.5 billion, respectively, widening the current account deficit to 3.5% of GDP, from the agency's baseline projection of 2.7%. Intensified or expanded conflict may lead to worse outcomes.
A shortage of foreign exchange recently led JPMorgan to exclude Egypt from its Government Bond Index for Emerging Markets (GBI-EM). Fitch believes this could add $1-2 billion to the country's external financing requirements in 2024 due to associated outflows.
These trends have put additional pressure on the Egyptian currency, with the parallel exchange rate reaching around 60 Egyptian pounds to one US dollar recently, further complicating the task of liberalizing the official exchange rate, which stood at 30.9 Egyptian pounds to 1 US dollar on January 19. The agency believes that exchange rate reform remains a key element in unlocking IMF financing, which in turn could stimulate other financing.
Foreign partners may be willing to increase support to Egypt in response to the conflict-related fallout, and the IMF program could be expanded. However, the government faces an increase in debt maturities this year of $8.8 billion, compared to $4.3 billion in fiscal 2023, and delays in distributing financing support could lead to significant erosion in Egypt's official reserves.
Jordan's large current account deficit compared to its counterparts in the credit rating constitutes a credit weakness. When Fitch affirmed its 'BB-' rating with a stable outlook in November 2023, it assumed that the conflict would contribute to a wider current account deficit of 7% of GDP in 2024, from the 5.3% expected in 2023, mostly through the impact on tourism.
Although tourism revenues could be supported by the resilience of arrivals from the Middle East (more than 70% of visitors), the agency expects a decline in the number of European and American arrivals.
Jordan's continued efforts to diversify its trade routes outside the Red Sea will help reduce the risks to its exports and imports of goods, and we do not expect Jordan's energy, water, or food supplies to be significantly affected.
The agency explains that if the scope of the conflict expands further, or continues beyond the first half of 2024, the risks threatening Jordan’s economic growth, public financial control, and internal political stability will also increase.
The current account deficit in 2024 could be moderately larger than 7% of GDP, but the IMF's new $1.2 billion Extended Fund Facility, approved in early 2024, should mitigate financing risks. The external environment supports reform momentum and investor confidence.
Fitch expects Jordan's external financing position and external reserves to remain consistent with its recent rating, supported by a record of strong support from bilateral and multilateral financing partners during several external shocks over the past decade and a half.
The government expects foreign aid commitments of US$3.5 billion in 2024, representing approximately 9.1% of GDP.