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Jeddah - Yasmine El Tohamy - RIYADH: Financial risks are increasing for countries neighboring Gaza, given the prolonged conflict and its spillage into nearby areas, says Fitch Ratings.

According to the latest “Fitch Wire” newsletter, the involvement of Yemen’s Houthi forces underscores the potential impact on external finances, particularly affecting Egypt and Jordan.

Egypt’s current account deficit narrowed in the fiscal year ending June 2023, which is attributed to a robust growth in tourism receipts and Suez Canal transits, which surged by over 25 percent.

Tourism earnings reached $13.6 billion, approximately 3.5 percent of the gross domestic product, while canal-related receipts amounted to $8.8 billion, equivalent to 2.2 percent of GDP, effectively offsetting a current account deficit of $4.7 billion, according to Fitch.

“The Gaza conflict and the Houthis’ disruption of canal traffic have curbed these earnings, adding to Egypt’s external financing challenges and downward pressure on its rating,” it added.

Factoring in the conflict’s impact, Fitch’s baseline projection anticipated tourism and canal earnings at $12.7 billion and $9 billion, respectively, for 2024. However, should disruptions endure into the first half of the year, Fitch warns of potential declines to around $11 billion and $7.5 billion, widening the current account deficit from the baseline of 2.7 percent to 3.5 percent of GDP. 

The firm noted: “Intensified or broadened conflict could result in even worse outcomes.” 

Foreign exchange shortages prompted JP Morgan to remove Egypt from its benchmark Government Bond Index - Emerging Markets, potentially adding $1 billion to $2 billion to the country’s external financing requirement in 2024.

These developments have intensified pressure on Egypt’s currency, with the parallel rate reaching approximately 60 Egyptian pounds per $1, complicating efforts to liberalize the official exchange rate, which stood at 30.9 pounds per $1 on Jan. 19. Exchange rate reform remains crucial for accessing IMF funding, which could, in turn, stimulate additional financing.

In response to conflict-related challenges, Fitch added: “Foreign partners may be willing to increase support for Egypt in response to conflict-related fallout, and its IMF program could be enlarged.”

It further explained: “However, the government faces increased debt maturities this year of $8.8 billion, from $4.3 billion in FY23, and delays in the distribution of funding support could result in significant erosion of Egypt’s official reserve buffers.”

While Jordan faces a sizable current account deficit relative to its rating peers, its external position surpasses Egypt’s, benefiting from resilient international support and ample reserves.

Projected to widen to 7 percent of GDP in 2024, the current account deficit in Jordan is influenced by conflict-related impacts on tourism.

Efforts to diversify trade routes and reduce dependency on the Red Sea are expected to safeguard goods exports and imports. Jordan’s energy, water, and food supplies are not anticipated to be significantly affected.

If the conflict persists or broadens beyond the first half of 2024, risks to Jordan’s economic growth and fiscal consolidation may rise.

Despite the potential for a moderately wider 2024 current account deficit, the recently approved $1.2 billion IMF Extended Fund Facility should alleviate external financing risks, supporting reform initiatives and bolstering investor confidence.

Fitch expected Jordan’s external financing position and buffers to align with its current rating, fortified by a history of robust support from bilateral and multilateral partners during various external shocks over the past 15 years.

The government anticipates foreign assistance commitments of $3.5 billion in 2024, equivalent to approximately 9.1 percent of GDP.