The Institute of International Finance (IIF) has praised Egypt’s economic resilience, stating that the country has shown "unusual strength" in the face of heightened geopolitical tensions following the recent military escalation between Israel and Iran.
In its latest report, the IIF said the negative impact on Egypt’s financial markets was temporary and limited, highlighting that the Egyptian pound briefly weakened during the initial days of the crisis but soon regained partial strength, continuing its gradual depreciation trend.
Meanwhile, Egypt’s sovereign risk premium remains near its lowest level in five years, reflecting improved investor sentiment and economic fundamentals.
Market Composure Amid Regional Volatility
The report attributed the relatively muted reaction of financial markets to what it called “investor desensitization” toward regional geopolitical risks. The MENA region has witnessed two years of prolonged conflicts in Gaza, Lebanon, Syria, and the Red Sea, which have shaped investor behavior.
“Egypt’s consistent market performance reflects a tangible improvement in its economic fundamentals,” the IIF noted.
Portfolio flows remained relatively stable, despite Egypt’s historical vulnerability to volatile “hot money” entering and exiting its high-yield treasury markets. The IIF observed that Egypt has experienced more episodes of capital flight exceeding one standard deviation than most emerging markets, including Turkey, Pakistan, and the Philippines.
However, the report highlighted that March 2024 economic reforms broke this pattern, attracting strong inflows into Egypt’s debt market, driven by interest rates reaching 27.75%. Since then, only four months have recorded net outflows, and those were absorbed quickly by subsequent inflows.
Investor Confidence Grows, External Dependence Shrinks
The IIF said the recent stabilization reflects a shift in funding strategy, as Egypt gradually reduces reliance on volatile portfolio flows to cover its current account deficit, favoring foreign direct investment (FDI) and official financing instead.
This strategy has been supported by the IMF and Gulf Cooperation Council (GCC) countries, both of which continue to provide essential financial backing.
The non-interventionist approach by Egypt’s Central Bank in the foreign exchange market also earned praise, as it allowed the pound to adjust freely, enhancing currency resilience and investor trust in market liquidity.
Fiscal Strength Persists Despite Suez Setback
Egypt's fiscal performance remained strong, with revenue growth supporting the government’s target of a 3.5% primary surplus of GDP for the 2024/2025 fiscal year, even as Suez Canal revenues weakened due to regional insecurity.
The IIF cautioned that the canal remains a major external vulnerability. Global shipping firms are unlikely to resume normal transit through the Suez Canal until at least three consecutive months of security stability in the Red Sea, pushing any full revenue recovery into early 2026.
Gas Disruptions and Summer Strain
The report also addressed the temporary gas export suspension from Israel in June, which led to power cuts in Egyptian factories, particularly in the steel and fertilizer sectors. The government prioritized residential electricity use amid tight supplies.
Although the measure was short-lived, the IIF warned that the summer season, combined with declining domestic production and reduced gas imports, may force difficult policy choices in the coming months.
Tourism and Reform Risks Loom
Tourism—a critical foreign currency source—has shown impressive resilience in recent years but remains at risk. Any direct attacks on Israel could impact tourism flows to Egypt’s nearby resorts, the report warned.
Internally, the IIF identified slippage on economic reform as Egypt’s greatest risk. The IMF postponed its fifth review of Egypt’s loan program and merged it with the sixth review, scheduled for autumn 2025, due to concerns over delays in the privatization program.
The program is seen as a cornerstone of Egypt’s international financing structure, particularly in attracting continued support from the IMF and Gulf states.
Debt Market Faces Structural Challenges
Despite progress, Egypt’s public finances remain under pressure, largely due to the high cost of local debt. The government aims to extend the maturity profile of public debt by reducing its reliance on short-term treasury bills and increasing bond issuance.
However, recent auction data suggests slow progress, with yields on short-term instruments remaining elevated, and geopolitical tensions in June briefly lifting risk premiums before easing again.
“Any renewed escalation in the region could revive those premiums,” the IIF warned, potentially complicating Egypt’s efforts to reduce debt servicing costs.
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