Red Sea Crisis May Trigger Egyptian Currency Devaluation, Warns S&P

Egypt may soon be pushed to further devalue its currency due to fallout from attacks on shipping in the Red Sea, S&P Global Ratings warned this week. The agency expects authorities could slash the pound's value against the dollar from 31 to around 60 - closer to volatile black market rates.

"Egypt's already tight foreign currency reserves are taking a major hit from plunging Suez Canal revenues," said S&P credit analyst Omar Shaaban. "Canal income is critical for Egypt, usually contributing nearly 8% of government revenue."

Increased exchange rate flexibility is a key tenet of Egypt's $3 billion IMF bailout program. S&P believes that subject to currency devaluation, the IMF may release loan disbursements and potentially extend the program. A clearer exchange rate policy could also spur remittance inflows and aid trade and growth, S&P noted.

However, S&P underscores challenges posed by tighter monetary conditions, which have led to a significant rise in the government's debt service on local-currency debt in recent months.

Despite these economic uncertainties, S&P suggests that rated Qatari entities exposed to oil and gas may experience minimal impact from the Red Sea crisis, particularly due to their customer base primarily situated in Asia. However, concerns remain regarding the potential closure of the Strait of Hormuz, which could significantly affect Qatari entities reliant on this vital export route.

The ongoing crisis has already prompted shifts in maritime traffic, with containerships in the Gulf of Aden witnessing notable declines. Qatar Energy's decision to halt tanker routes through the Red Sea further illustrates the disruption. Such disruptions could impede the delivery of Qatari liquefied natural gas (LNG) to Europe, as well as Russian and US LNG shipments to Asia, necessitating alternative routes with longer transit times.

S&P underscores the need for vigilance amid evolving developments in Egypt's foreign currency controls, particularly concerning the liquidity positions of Egyptian banks. The implementation of structural reforms under the IMF program marks a significant step towards enhancing Egypt's business environment and reducing government dominance in key sectors, signaling a commitment to economic stability and growth.

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