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How will the Israel-Iran war affect the Egyptian economy?
The Egyptian economy continues to tremble with uncertainty in the face of the widening regional war escalated when Israel attacked Iran on Friday night.
By the end of Sunday's trading session, the stock market's main indices declined, with total losses amounting to LE93 billion. The Egyptian pound also weakened, reaching a value of LE51 to the dollar, compared to nearly LE49.8 last week.
As the war continues, Egypt faces a series of profound economic repercussions, sources in the Parliament and domestic banking and financial sectors told Mada Masr, marked most prominently by the exit of hot money from the country.
Hot money is still the main factor propping up the pound's value, and if it goes, exchange rates will fall and, combined with global price hikes on oil and natural gas, Egypt could see a new wave of inflation.
Hot money withdrawal
Investors already began to withdraw hot money from the domestic market on Sunday.
A hot money outflow ranging from US$3 billion to US$4 billion is expected this week, a financial analyst at an investment firm told Mada Masr. The forecast was echoed by Mahmoud Sami, a member of the Senate Financial and Economic Affairs Committee, and Saad Ali, a financial analyst at Okaz Investments.
The three sources also expected that the withdrawal of hot money could cause the exchange rate to rise to a rate LE52 to LE52.2 per dollar.
Egypt's risky reliance on hot money was laid bare following Russia's invasion of Ukraine, when investors withdrew nearly $22 billion out of Egypt to seek safer debt markets. The resulting capital flight triggered a severe foreign currency crisis that persisted for two years, during which the dollar surged from LE15 to LE50.
Current estimates place the amount of hot money in Egypt's bond market at $30 to $35 billion, according to the three sources.
Hot money inflows are a key pillar in maintaining the stability of dollar liquidity and ensuring the availability of foreign currency in the economy — a factor that has been reflected in the relatively stable exchange rates over the past several months.
Exchange rate and futures exchange
The price of the dollar began to rise on Sunday, posting a rate of LE50.56 compared to LE49.5 before Israel's attacks on Iran, according to central bank data. A sharper rise was recorded in other Egyptian banks on the same day, with the price of a dollar reaching LE50.87 in the Abu Dhabi Islamic Bank.
The exchange rate then slightly stabilized on Monday, dropping by 0.33 points to LE50.23.
Rates on Credit Default swaps (CDs) were also negatively impacted, rising to 560.3 points and marking a 12 percent increase compared to rates ahead of the Israeli aggression on Iran.
The pound's one-year forward exchange rate, also known as Non-Deliverable Forwards (NDFs), rose as well from LE58.80 to LE60 per dollar on Sunday, financial analysts told Mada Masr.
Oil and fertilizer prices
In addition to the rise in the pound's exchange rate, oil prices surged by seven percent after Israel attacked Iran. On Friday, prices peaked at $77 per barrel, up from around $60 at the start of June, before stabilizing around $70. The spike followed Israeli strikes on Iran's oil and gas fields, which account for nearly 11 percent of total production by OPEC oil-exporting countries.
Natural gas prices also saw a rise by nearly 13 percent following the regional escalation.
Israel's decision to halt its natural gas supply to Egypt in late May prompted the government to cut gas supplies to fertilizer factories, leading to a suspension of their production and, consequently, their exports.
While this comes amid rising global prices and a halt in local market supplies, summer season crops —which began last month — will not be affected, Hatem Naguib, head of the Federation of Egyptian Chambers of Commerce Vegetable and Fruit Division, and a former Agriculture Ministry advisor told Mada Masr.
Both sources, however, said the situation could become concerning if the halt in fertilizer production drags on, warning it could lead to a shortage of fertilizer supplies at the start of the winter season and consequently drive up prices.
Higher insurance costs for shipping
A rise in maritime transport costs has also been recorded, which translated into higher insurance costs for shipping due to the increased risks of an escalating Israeli-Iranian war, former member of the Suez Canal Authority Wael Kadoura told Mada Masr.
The hikes come as 80 to 85 percent of Egypt's total imports are transported by sea, Kadoura noted, warning that continued military escalation between Israel and Iran could worsen the crisis of shipping companies avoiding the Suez Canal and increase the likelihood of re-routing via the Cape of Good Hope.
Fees levied on vessels passing through the Suez, which links the Red Sea and the Mediterranean, form a key component of Egypt's budgetary resources.
These revenues have already taken a hit, with the central bank recording a 24.3 percent drop in receipts for FY 2023/24 due to maritime disruptions stemming from Houthi attacks aimed at deterring Israel's ongoing war on Palestinians.
A boost to inflationary pressures
The rise in both the exchange rate and in commodity prices globally, paired with the increased costs of insurance on shipping, will increase the pressure on the general budget, the MP and two financial analysts explained, and deepen the rise in inflation rates, which have already been witnessing a rise over the past three months due to fuel price increases.
According to the sources, the government plans to raise fuel and electricity prices again at the start of the upcoming fiscal year in July, in line with International Monetary Fund conditions tied to Egypt's US$8 billion loan program.
Energy prices have already been raised multiple times in recent years under a plan to phase out subsidies by the end of 2025.
A source in the House of Representatives Planning and Budgeting Committee told Mada Masr on condition of anonymity that the recent regional escalations have sparked renewed talks with the IMF.
According to the source, the fund has shown some flexibility on the timeline for reaching cost-recovery pricing if global oil prices continue to rise. However, this flexibility does not apply to the upcoming consumer price hikes, he noted.
Consumers have been affected by a noticeable rise in inflation rates during the past three months, after nearly four months of a slowdown in inflationary pressures.
In May, inflation witnessed the sharpest rise in eight months, with a 16.5 percent increase compared to the same month last year and a 1.8 percent hike compared to April. Analysts pointed to energy prices as the main factor behind the surge.
In televised statements on Monday, attempting to appease the public amid the regional escalations, Cabinet spokesperson Mohamed al-Homsany reiterated the government's commitment to its 'promise' not to raise fuel prices before October, though he acknowledged that global fuel price fluctuations, especially amid the Israel-Iran escalation, will likely impact efforts to contain inflation rates.
The two financial analysts agreed that the current regional escalations and their repercussions on the Egyptian economy will likely prompt the central bank to hold off on the monetary easing policy it has been aggressively pursuing in April and May.
They therefore predicted that the central bank's Monetary Policy Committee will fix interest rates in their upcoming meeting to preempt further inflation.
