(Bloomberg) -- Two months ago, Egypt looked like a country in grave danger of financial collapse. Now the world has urgent new reasons to come to the rescue.

Israel’s war with Hamas has put Egypt center-stage. It’s the only gateway for aid to reach Gaza, and besieged Palestinians to escape. It’s a key player in hostage talks that allowed a truce after six weeks of fighting. Abdel-Fattah El-Sisi, the former army chief set to be re-elected as president in a barely contested vote next week, is suddenly high on the must-visit list for global leaders.

All of this translates into leverage that Egypt — even though it’s the Middle East’s most populous nation, and sits astride one of the world’s busiest trade arteries — hasn’t enjoyed for decades. And its economy has rarely been in more dire need.

Up and down the country, the costly showpiece projects of the president’s decade-long reign — highways, ports, a new capital city — are taking shape against a backdrop of growing strain on Egypt’s finances and hardship for its more than 105 million people.

Inflation is running above 35%, the currency’s black-market exchange rate is far above the official one, and international capital has fled — leaving Egypt starved of dollars.

Fail to find more, and the country could be at risk of default on $165 billion of foreign debt — effectively wiping Egypt off the map for investors once drawn there by some of the world’s fattest returns.

Too Big to Fail?

Markets still price that as a serious possibility — Egypt’s dollar bonds yield around 15%, well into distressed territory — but not quite as critical as it was before the Gaza war. The betting is that potential backers, from the International Monetary Fund and European Union to the oil-rich Gulf states, now have more pressing incentives to stump up some cash – and perhaps go easy on attaching strings.

“No one wants to see Egypt fail now, or economic conditions to worsen,” says Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC. The outbreak of war means “more international partners will likely be willing to provide additional support.”

That’s why Wall Street giants from Bank of America Corp. to Goldman Sachs see the danger of an immediate debt crunch receding. Last week, Morgan Stanley’s emerging-market strategists put Egypt’s 30-year dollar notes on a list of “nine bonds to buy.”

Egyptian officials say the country won’t default on any obligations, and any restructuring of Eurobond debt has been ruled out, according to people familiar with the deliberations. The government is in talks to boost its IMF credit line to more than $5 billion, from a current $3 billion, and the fund’s chief says an increase is  “very likely.” 

The EU is promising to accelerate an investment plan worth some $10 billion. Nations like Saudi Arabia and the United Arab Emirates have propped up Egypt in the past with cash deposits at the central bank. Gulf states haven’t pledged extra support since the Gaza war began, according to people familiar with the matter, and any new commitments will be part of wider investment deals.

Even if geopolitics offer Egypt some financial breathing room, and bargaining power, there’s mounting pressure on El-Sisi to change course.

After the election, he’ll likely have to stomach another currency devaluation — which will heighten Egypt’s cost-of-living crisis — and sell off more state companies, including some run by the powerful military that has holdings in industries ranging from food production to cement.

Grand Dreams and Dire Needs

Perhaps the best example of the president’s ambition to give his country a facelift is the city under construction east of Cairo. Still known only as the New Administrative Capital, it has a footprint four times that of Washington DC and a skyline featuring Africa’s tallest tower and the Middle East’s biggest church. Its main avenue runs past gleaming ministry buildings and green lawns to the sandstone dome of Egypt’s new parliament.While some areas look ready to move in, others are nowhere near completion. On a recent weekday, small groups of laborers took a break from the desert heat in the shadow of what’s slated to be the central business district, still under heavy construction behind barriers. Companies and embassies that the government hopes to attract haven’t committed to a move.

Elsewhere in northern Egypt, a road-building spree has eased some of the country’s notorious traffic. On the Mediterranean coast — home to some of the country’s best golden sands and long a favorite vacation spot for the upper classes — what’s been dubbed a summer capital is taking shape, with 30-plus story beachfront towers and fine-dining options.

Not all the building projects are this grand. Hundreds of miles south, in the Sohag region of impoverished upper Egypt — where the country’s very first pharaoh Narmer unified his lands into a single kingdom 5,000 years ago — there’s concrete housing and schools that weren’t there before El-Sisi took charge. But there’s also a shortage of teachers — and of imported products, which is slowing some building work.

Locals worry about other things. Hassan Ali Hassan has no water in his home. The 70-year-old has to send his children to fetch it from the Nile, carrying jerrycans up steep riverbank steps and across a dangerous road. In the nearby village of Awlad Salama, 30-year-old Safaa says she’s struggling to cope with “price craziness” and can no longer afford what she calls the poor man’s food — staples such as rice and pasta that are used to make Egypt’s national dish, koshary.

All the makeovers have come at a cost. Egypt’s current account has been in deficit for over a decade and foreign debt has ballooned by more than 50% since 2019. The government spends almost half its revenue on interest payments.

It’s the need to plug this financing gap that turned Egypt into a serial IMF borrower. After four loan deals during El-Sisi’s rule, only Argentina now owes the Fund more. But with some $28 billion of short-term foreign debt to roll over next year, and medium- and long-term amortizations adding another $21 billion, other sources of cash are needed.

End of Hot Money

For a while, Egypt relied on hot money from portfolio investors to fill the hole. Interest rates far above inflation, coupled with a tethered currency, made it a market darling. The strategy unraveled when Russia invaded Ukraine in February 2022, sending commodity prices soaring. Egypt, which needs imported oil and is one of the biggest buyers of wheat, was blindsided.

Some $20 billion in foreign cash subsequently exited the country as global interest rates rose — forcing three devaluations that have halved the pound’s value. Egypt became one of the world’s hotspots for food inflation.  

In Alexandria, on Egypt’s Mediterranean coast, the price of a pack of sugar has doubled this year to 47 pounds. Kareema, a mother of four kids, says she’s dependent on mobile stalls operated by the military to buy staples like sugar, fruit and vegetables at subsidized prices. They sell out fast, and she has to wake up at 5:30 a.m. to ensure a spot near the front of the line.

The cost of imported food and fuel will climb even higher if Egypt allows its currency to weaken sharply — a move El-Sisi has been resisting, but one he’s widely expected to make after the elections. The IMF warned against “bleeding” reserves to defend the pound. The next devaluation could be the biggest yet, based on the local black market that prices the currency some 40% below its official exchange rate.

Another currency adjustment may bring back portfolio investors and speed the sale of more Egyptian state companies, including to crucial Gulf investors. The Gaza conflict gives El-Sisi a stronger hand to bargain over details, though it may also add some new financial pressures for Egypt — like choking off tourism, a key foreign-currency earner.

‘At Least We Are Alive’

In time, Egypt’s economic woes could spell trouble for El-Sisi, whose last two predecessors were ousted after explosions of popular unrest. For now, many Egyptians are rallying round their leader over the Gaza war.

It’s hard to gauge the president’s popularity because most political dissent has been muzzled. El-Sisi won more than 90% of votes in the 2014 and 2018 elections. In the runup to next week’s vote, Cairo’s highways, flyovers and streets are festooned with pictures of him, while Arabic-language slogans deign him the “Beloved of Egyptians” and declare “We are all with you.” 

Posters featuring his three challengers are scarce. A former lawmaker seen as posing slightly more of a threat failed to gather enough endorsements to run and said his supporters had been harassed. The elections authority has said it found no evidence of wrongdoing. 

Still, if the country’s crisis-fighting role has changed the way global diplomats and financiers view it, then there are signs of a similar effect at home too.

In Sohag, where about 60% of the population live in poverty, villagers say they appreciate El-Sisi’s efforts to get aid into Gaza — and his refusal to countenance a plan floated early in the conflict for the mass relocation of Palestinians into Egypt. That would raise the risk they’d never be allowed back to their homeland, and it could also bring Hamas onto Egyptian soil. It’s become a red line for El-Sisi and other Arab leaders.

What’s more, everyone in Sohag is aware of the human toll of the war raging 400 miles away. Safaa, who lives in a one-room mud-brick village home, says it’s put her own acute troubles — how to feed and clothe her family as prices soar — in a new perspective.

“Even if we are struggling to live,” she says, “at least we are alive.”

--With assistance from Michael Gunn.

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