Egypt currency devaluation falls short

07 April 2016

Dollar scarcity worries still prevent project finance deals

The recent devaluation of the Egyptian pound to £E8.78 a dollar has not improved the project finance outlook in Egypt, according to bankers.

The continuing shortages of foreign currency and the lack of appetite from commercial banks are still major obstacles.

“We’re basically in the same situation,” says one Egyptian banker. “There has been some improvement in that more IFIs [international financial institutions] and ECAs [export credit agencies] are interested in the market and transactions, but we have the same issues with foreign currency shortages.”

This is especially affecting projects where tariffs are in local currency, such as the Abu Rawash wastewater treatment plant and the renewables feed-in tariff projects.

Egyptian banks cannot lend in hard currency unless an entity has revenues in hard currency. Developers need access to large amounts of foreign currency to source equipment from abroad.

Other power schemes, such as the Dairut independent power project (IPP) and the Gulf of Suez wind IPP, receive their tariffs in dollars, and so are in a better position.

So far, IFIs have been offering to provide the foreign currency tranches of loans for key infrastructure projects such as the solar feed-in tariff schemes. But they have limited capacity and strict lending conditions that tend to exclude coal and petrochemicals projects.

Further devaluation is not a solution unless the core problem, the scarcity of hard currency, is addressed at the same time.

International banks see little prospect of Egypt becoming an attractive market. Those in the GCC are also dealing with falling liquidity caused by low oil prices.

“It’s not the right time for GCC banks to be looking at North Africa and internationally as it is difficult to justify deploying capital there,” says a GCC banker. “The devaluation doesn’t address the fundamental structural risk of doing business in hard currency in Egypt.”

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