Investors and analysts are sounding the alarm that Tunisia and Egypt are on the verge of a major debt crisis that could affect the troubled North African region and put wealthy Gulf countries in difficult positions. Both countries are already facing challenges due to shortages of essential goods and instability in financial markets. Additionally, Tunisia is experiencing a political crisis stemming from President Kais Saied's tightening grip on power and suppression of opposition.
There has long been a strong belief that Egypt is too big to be allowed to collapse, being the largest economy in North Africa and the most populous. However, Tunisia also holds significant importance as the birthplace of the Arab Spring and is supposed to be the only success story among the region's uprisings.
Tunisia still hopes to receive long-awaited support from the International Monetary Fund (IMF), although concerns remain about its commitment to any program amid political division. Matt Vogel, the Director of Emerging Markets at FIM Partners, stated, "In light of current policies, we must question whether any IMF program will withstand the first or second review."
Tunisia faces one of the highest public sector wage bills in the world, meaning that the public finance deficit is expected to remain around five percent of GDP, according to J.P. Morgan estimates. While Morgan Stanley warns that foreign currency reserves will not be enough to cover essential goods imports for two months even at this time next year, given the current rate of depletion of those reserves.
**Pressure in Egypt**
Egypt's public finances are under pressure despite the agreement on a three billion dollar rescue program with the IMF in December. The debt-to-GDP ratio is rapidly approaching one hundred percent. The pound has lost fifty percent after being devalued three times over nearly a year, meaning that interest payments on the debt alone, much of which is borrowed in dollars, euros, or yen, will consume more than half of government revenues next year, according to Fitch.
Fitch downgraded Egypt's credit rating again last Friday.
**Significant Consequences**
For asset management firms, there has been a painful 20 percent drop in the value of Egypt's international bonds, which are nearing 30 billion dollars this year. Revenue from the Suez Canal and tourism has improved, but Cairo must repay 5.8 billion dollars in principal and interest on its bonds next year, while these bonds represent a weight of two percent in the most closely monitored emerging market debt indices.
