Global index provider FTSE Russell is adding Egypt to a watchlist for possible demotion in its suites of equity indexes amid reports of foreign investors having difficulties repatriating capital from the country, it said in a statement (pdf) on Thursday. Egypt is at risk of being demoted from “secondary emerging market” to “unclassified,” a move which could see Egyptian equities deleted from the provider’s indexes.

We have a few months to turn things around: FTSE will share its update of Egypt’s watchlist status in March 2024 as part of its Equity Country Classification Interim Review, it said in an announcement (pdf).

The rationale: FTSE says “market participants and index users have reported ongoing delays on their ability to repatriate capital from Egypt since March 2023,” adding that it had conveyed these concerns to “the Egyptian authorities.” The index provider will try to assess the length of the delays and the issues faced by international investors when trying to repatriate capital. You can find FTSE’s full criteria here (pdf).

It’s all because of the FX crunch: The country remains in the grip of an ongoing hard currency shortage, triggered in part by major foreign portfolio outflows as global economic conditions tightened following the outbreak of the Russia-Ukraine war. A sharp shortage of FX is making it difficult for investors to repatriate capital when exiting a position here.

FTS E isn’t the only one: Global index provider MSCI in June said it could consider reclassifying its Egyptian indices from “emerging” to “frontier” or “standalone” status, citing the FX liquidity crunch. Moody’s in August extended its review of a potential downgrade for our sovereign credit rating, while JPMorgan last week put Egypt on review for potential removal from its widely-tracked suite of emerging-market sovereign bond indexes.

And neither is Egypt: FTSE has also put Pakistan and Vietnam on the watchlist. Pakistan could drop to “frontier market” from “secondary emerging market” while Vietnam will remain on the watchlist for a possible upgrade to secondary emerging from frontier.

Bond investors are “wary of committing capital” here on concerns about debt service after two delays have seen us (so far) fail to unlock funding from our USD 3 bn program with the International Monetary Fund, Bloomberg writes. This comes as we face what Goldman Sachs warns is a USD 11 bn funding gap in the next five years and a wall of interest and principal due over the coming decade.

“I don’t think the risk of default is imminent, but the status quo is clearly unsustainable,” emerging-markets money manager Carlos de Sousa told Bloomberg. London-based analyst Gordon Bowers notes that “barring another dramatic external shock,” we’re unlikely to default on our debt over the next year. The fund manager holds overweight positions in Egypt’s debt in its “unconstrained” accounts.

Pulse check on the debt market: Our USD debt has lost around 9.7% this year, making us the worst EM performer after Bolivia and Ecuador, according to Bloomberg. Meanwhile, many bonds have entered distressed territory, with yield spreads between Egyptian USD bonds and US treasuries climbing to 1,165 basis points. Bonds trading at more than 1,000 bps above treasuries are considered to be distressed.

Could be looking up on the IMF front? The Madbouly government’s recent efforts to sell down state assets has reportedly left the IMF feeling positive about our commitment to privatization, potentially easing the path towards a review of our USD 3 bn loan program, Bloomberg reported last week. Hurdles remain, however, with the two sides yet to agree on a pathway to floating the currency or curb government spending on infrastructure projects.

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