As fears of a broader regional war mount following Israel and Iran trading airstrikes, we take a look at what it all could mean for Egypt. Could disruptions to energy flows, shipping routes, and tourism inflows put pressure on our external position and macro stability, and could we see foreign investors spook? We take a deep dive into the potential economic consequences for Egypt if the hostilities persist or escalate.

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The most dangerous confrontation between Israel and Iran in years: After months of heightened tensions between the two, a war of words quickly escalated into an escalating conflict after Israel struck military and nuclear sites on Friday morning, along with targeted assassinations of senior military figures and nuclear scientists. The two have since exchanged missiles and airstrikes over the weekend and show little signs of looking for an offramp, with Iran vowing revenge and Israel threatening even more devastating strikes to come and hitting at regime change.

WHAT DOES IT ALL MEAN FOR EGYPT-

Exchange rate, inflation, and monetary policy under pressure: HC Securities’ Nemat Choucri told EnterpriseAM that escalations could lead to “supply chain disruptions, which could negatively impact inflation and potentially disrupt the pace of Egypt’s easing cycle.” She added that “oil prices have increased, and Egypt’s Oil Ministry announced that it will need to cut its natural gas supply to some industrial activities.”

What does the rise in oil prices mean for us? Banking expert Hany Abou El Fotouh warned that “with rising oil prices, the import bill is likely to increase, which could put pressure on the balance of payments in the short term.” He also noted that while the EGP has held steady for now, “continued tensions could prompt some foreign investors to hedge, which would increase local demand for USD.”

We’re trying to secure a strategic energy reserve: Egypt signed a natural gas import agreement over the weekend to build a six-month strategic reserve of petroleum products amid rising geopolitical risks. We have the full story in the news well below.

BY THE NUMBERS– Brent crude jumped 7.0% on Friday to USD 74.23 a barrel, marking the largest intraday moves since 2022, Reuters reports. But despite the sudden rise, prices remain in the red y-o-y and well below their 2022 peaks reached a few years back after Russia launched its war on Ukraine.

But oil prices could rise further, with Israel now targeting Iranian energy sites: Israel expanded its focus to include Iran’s energy infrastructure yesterday, with a strike on an Iranian natural gas processing facility in the South Pars gas field — the world’s largest. Although the field’s output is primarily for the domestic market, Israel’s turn towards energy targets could add even more volatility to the international energy market.

Basic commodity reserves should help the local market stocked and prices in check: The state’s reserve of basic commodities exceeds six months, which should keep products on shelves and at reasonable prices, the Supply Ministry said in a statement. The ministry also said it will be extra vigilant to address any price gouging and to ensure the continued supply of products.

Capital markets could see renewed outflows: “We may see some panic selling in treasuries and equities by foreign investors as an initial reaction due to the region’s increased geopolitical risk,” Choucri said. Economist Hany Genena similarly told EnterpriseAM that a “partial exit is likely, which is normal due to fears of FX instability.” However, he dismissed the possibility of a full-blown exit similar to the 2022 hot money crisis, unless key inflows are severely disrupted. “A complete exit is unlikely unless investors start to fear a full halt in tourism revenues, remittances, or other inflows — which seems highly improbable given that both tourism and capital flows held up during far more turbulent periods over the past two years,” Genena told us.

Hot money jitters are resurfacing: The current situation has reignited fears of foreign portfolio outflows from Egypt’s local debt market, a government source added. Foreign investors had returned to EGP-denominated local debt last month following a sharp exit in April, supported by the central bank’s easing cycle. The Finance Ministry’s pivot toward longer debt maturities is expected to help mitigate exposure to hot money volatility.

A rethink of subsidy reform could be in the cards: One potential outcome of the regional escalations could be a shift in the government’s fiscal strategy. Genena said the situation “could prompt Egypt to submit a request to the IMF to reconsider the current timetable for phasing out fuel and electricity subsidies.” This sentiment was echoed by Abou El Fotouh, who warned that further increases in oil prices “could require a reassessment of some subsidy items or the pricing of petroleum products.”

No immediate impact on the Suez Canal but risks remain: While the Suez Canal has not seen disruptions so far, Abou El Fotouh cautioned that “disruptions in regional maritime security or significant rises in ins. costs could temporarily prompt shipping lines to reconsider their routes.” This would derail efforts to bring back global shipping lines to the waterway. Transit receipts from the Suez Canal dropped 62.3% y-o-y to USD 1.8 bn in 1H FY 2024-2025 on the back of Red Sea disruptions that pushed ships to reroute away from the canal.

Egypt has some policy space — for now: Despite the risks, Genena suggested that Egypt’s macro position remains stable enough to weather short-term turbulence. “The credit default swap (CDS) spread remains very low at around 5.3%, which gives Egypt room to continue its planned issuances of bonds and sukuk to refinance external debt obligations in 2H 2025.”

Sukuk program still on track: While it’s still too early to assess how regional escalations will affect Egypt’s upcoming sukuk issuance, a government official told us that the program is moving forward as planned. A pipeline of projects and investments is currently being assembled under a broader local sukuk framework.

NUCLEAR SAFETY CONCERNS + EGYPT’S DIPLOMATIC RESPONSE-

Radiation risks? Not for Egypt, says nuclear watchdog: The Egyptian Nuclear and Radiological Regulatory Authority (ENRRA) said that radiation levels remain “under control” at Iran’s Natanz nuclear facility — a target site of Israeli airstrikes. “There are no indicators of any radiation leaks so far,” the authority said, citing coordination with the International Atomic Energy Agency and local authorities. ENRRA added that its early warning and monitoring network continues to track background radiation data to ensure public safety.

Cairo calls for de-escalation: The Foreign Ministry issued a statement on Friday morning strongly condemning Israel’s airstrikes on Iranian territory, calling the attack “a dangerous escalation that represents a blatant violation of International Law, and a direct threat to regional and international peace and security.” Egypt reiterated its long-standing position that “military solutions are no way to address the region’s crises” and called instead for “respecting the sovereignty and territorial integrity of states” as a basis for peace.

Abdelatty warns against chaos in a call with Iran’s FM: Foreign Minister Badr Abdelatty spoke with his Iranian counterpart Abbas Araghchi on Friday to discuss the “dangerous implications” of the Israeli attack. Abdelatty reiterated Egypt’s “rejection and condemnation of violations of state sovereignty” and warned of the risks of “dragging the region into full-blown chaos.”

More calls with regional leaders: Abdelatty also spoke with his Qatari, Saudi, and Jordanian foreign ministers, with talks centring around the “grave consequences” of the Israeli escalations and their repercussions on broader regional stability. President Abdel Fattah El Sisi also spoke with Turkish President Recep Tayyip Erdogan yesterday to jointly emphasise the need for deescalation.

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