Conflict in Red Sea Will Weigh on Egypt’s Elevated Financing Needs; Inflation To Soar: IMF

The Red Sea crisis will further elevate public sector gross financing needs for most emerging markets and middle-income countries in MENA, especially Egypt and Tunisia, stated the Regional Economic Outlook (REO) report on the Middle East and Central Asia.

Turbulence in the Red Sea emerged as a repercussion of the Israeli war on Gaza.

According to the International Monetary Fund (IMF), MENA’s financing needs in 2024 are projected at $186 billion (up from $156 billion in 2023), an increase of about six percent of fiscal revenues compared to projections in October 2023, added the report released.

The high financing needs are expected to be covered mainly through domestic bank financing, the report said. External financing would contribute only a small portion of the amount needed, as limited market access for highly indebted countries remains a strain.

The report highlighted the impact on MENA of halting the transiting of several shipping companies through the Red Sea in response to the tensions in the maritime lane, noting that Egypt’s economy will particularly be affected.

In this respect, the report said that Egypt’s foreign exchange flows may be adversely impacted, as Suez Canal revenues are a critical source of foreign exchange for the country.

“Inflation is set to remain elevated across MENA’s emerging markets and middle-income countries at 25.6 percent in 2024 and across low-income economies at 69.9 percent, especially in Egypt, Sudan, and Yemen,” according to the report.

Additionally, heightened uncertainty is expected to weigh on investor sentiment and net foreign direct investment (FDI) inflows into the country, said the report.

“Coupled with the sustained adverse impact of foreign exchange shortages on private sector activity, these factors are projected to negatively impact the external sector and economic growth.

In turn, real GDP growth is projected to decline to 3 percent in 2024 (a downward revision of 0.6 percent relative to October’s projections,” the report added.

Gaza's immediate neighbours face a challenging outlook, according to the report.

“So far, Egypt’s tourism sector has been less severely impacted than in some other economies (Jordan, Lebanon). However, high-frequency tourism data show signs of a possible deterioration,” the report stated.

Tourism revenues account for 2-20 percent of 5he region’s GDP and between five and 50 percent of goods and services exports before the pandemic, stressing that the war will inevitably dampen growth.

The REO report also expected MENA’s real GDP growth to slow down in 2024, driven mainly by the repercussions of the Israeli war on Gaza, lower oil production, tight monetary policy settings in many MENA emerging market and middle-income economies, and the conflict in Sudan.

The report downgraded its projection of the region’s real GDP growth in 2024 by 0.5 percent to 2.9 percent, assuming the conflict in Gaza would ease after the first quarter of 2024.

Disinflation is expected to continue in most MENA economies, although price pressures have proven persistent in some cases because of country-specific factors.

“This downgrade reflects mainly the adverse implications of the conflict, which are compounding challenges for highly exposed economies, and additional voluntary oil production cuts,” the report explained.

Inflation in MENA is expected to continue moderating in most economies, reaching 14.4 percent in 2024, 0.6 percent lower than October’s projection.

“Uncertainty and downside risks for the region’s economies have risen significantly since October, with the duration of the conflict and scope for escalation still uncertain.”

“Even if the conflict remains contained to Gaza and Israel, the situation remains fluid and highly uncertain. The drone attacks in the Red Sea in December 2023 highlight the unpredictability.

With an escalation of the conflict, a more severe or persistent negative impact on tourism could materialize,” said the report.

It also expected higher energy and borrowing costs from an unexpected tightening of regional financing conditions to hold back the region’s growth.

On the fiscal side, the report noted that expenditures could rise amid needs to support vulnerable households and displaced families and to bolster security, especially for economies in close proximity to the conflict.