Bottom Line: Desperate for foreign oil companies to continue investing, Egypt is now trying to restructure $5.4 billion in debt it owes to them before it affects the $8.5 billion they are expected to invest in exploration and development for this fiscal year, which ends June 2014.
Analysis: Last week, Egyptian officials began putting plans together to negotiate new terms and a repayment schedule with foreign oil companies for all or part of $5.4 billion in outstanding payments. At this point it remains unclear if the entire amount is being restructured, or just a portion—but what we do know is that one of the options is to allow foreign companies to boost crude and condensate output and export the increase as partial repayment. This comes along with plans for a new economic stimulus package that is cause for some optimism. The new stimulus package calls for $3.2 billion in new investment projects over the next 12 months. This is a positive development if indeed this money is spent on investment rather than on new subsidies. The new investment projects will focus on key infrastructure and utilities, which could be a much-needed boom for the construction sector, and this has significant tie-ins to other sectors and to the labor market. The goal over the next 10-12 months is to boost GDP to 3.5% (currently at 2%) and to reduce the budget deficit to 9% (currently at 14%).
Recommendation: While a restructuring of debt to foreign oil companies is long overdue, this is still in its early stages and it remains unclear how the new package will be received. At the same time, while work on an economic stimulus package is encouraging, we still are hesitant to accept the plan as feasible. A careful review of the plan brings into question where the $3.2 billion will come from as there is no plan to cut public spending or raise taxes. However, this is not a huge stimulus package and there are hints that much of it could be funded through Gulf country grants. At this point, due to the worsening security situation, the government cannot rely on tourism for growth, and the next viable growth sector would be construction. The only way to make this economic stimulus plan feasible is with financing from Saudi Arabia and other Gulf countries. If they come through with the rest of the $12 billion they have pledged, then we will consider this economic stimulus package feasible.