The Egyptian economy has succeeded in absorbing the repercussions of the recent regional shock better than expected, benefiting from the improvement in international reserves, the flexibility of the exchange rate, and the speed of policy response. However, the economy’s ability to continue its resilience will remain linked to addressing chronic weaknesses, most notably the high public debt and financing needs, the continued exposure of the banking sector to the government, and the expanding role of the state in economic activity.
In an article published by the International Monetary Fund under the title “Resisting Under Pressure: The Egyptian Economy Defies Expectations,” Amin Mati, head of the Fund’s mission to Egypt and Assistant Director of the Middle East and Central Asia Department, and Yevgenia Kornienko, the senior economist in the same department, said that the reforms implemented within the framework of the Fund-supported program helped boost growth, put inflation on a downward path, rebuild reserves and improve banks’ foreign asset positions.
The Fund's latest assessment indicates that Egypt's total financing needs will remain around 40 percent of GDP in the near term, before gradually declining to less than 30 percent by 2030. This comes at a time when financing is largely dependent on short maturities, while banks remain highly exposed to government debt.
The markets received the shock... and the economy absorbed it
Egypt entered the recent regional conflict from a stronger macroeconomic position than during previous external crises, after an IMF-backed reform program helped boost growth, put inflation on a downward path, rebuild international reserves and improve banks' foreign asset positions.
When pressures intensified, markets reacted quickly and sharply. Non-resident investors' holdings of government debt denominated in the pound decreased from $39.1 billion in February to $22.2 billion in early April, while the Egyptian pound declined by about 14 to 17 percent.
However, the exit of funds did not turn into a broader economic crisis. As the pressures subsided, investment portfolio flows returned, non-resident holdings approached pre-conflict levels, and the pound recovered a large portion of its initial losses.
The IMF links an important aspect of this performance to the flexibility of the exchange rate, which allowed it to absorb part of external pressures, in addition to adjustments in energy prices after the rise in global oil prices, controlling spending, and expanding the scope of support directed to those who deserve it.
Growth hasn't stopped
What is noteworthy is that the financial turmoil did not spread to economic activity with the same severity. The growth of the Egyptian economy reached 5 percent in the third quarter of the fiscal year 2025-2026, while the tourism sector maintained its ability to withstand, and remittances from Egyptians working abroad rose to record levels, while Suez Canal activity continued its gradual recovery after temporary disturbances related to regional tensions.
The government was also able to contain fiscal pressures by increasing domestic revenues and reducing spending.
As for inflation, it rose due to the depreciation of the currency and energy price adjustments, but the increase was less severe than expected. On the other hand, the impact of the shock delayed the path of inflation returning to its target by about a year.
The maintenance of international reserves at comfortable levels, despite capital outflows at the beginning of the crisis, was one of the most prominent indicators of improvement compared to previous crises.
Investors return to Egypt
As tension in the markets subsided, investor confidence gradually improved.
The risk premium on Egyptian sovereign bonds fell below pre-war levels, while Cairo returned to international capital markets with issuances that met with strong demand. In May, Egypt issued “Eurobond” social bonds worth $1 billion, which were oversubscribed 5 times the amount offered, before issuing in June a “Samurai” bond worth $500 million.
By August, Egypt's sovereign risk premium had fallen to its lowest level since 2014, according to the IMF.
But improving market indicators does not mean that fundamental vulnerabilities have disappeared.
Financing needs remain a pressure point
But public debt remains high, overall financing needs are large, while a significant portion of borrowing depends on short terms, which increases refinancing risks if global market conditions change.
The IMF warns that these factors, along with banks’ increased exposure to the government, make Egypt more sensitive to shifts in global financing conditions and to any new external shocks.
The close relationship between the government and the banking sector may increase the risks of what is known as “public finance dominance” over economic policies, while the government’s large financing needs may crowd out credit and investment in the private sector.
Here the issue emerges that the Fund believes is most important for long-term growth: the size of the state in the economy, as it said: “The state’s presence in the economy is still excessively high.”
From shock management to reducing the role of the state
The Fund believes that maintaining the gains achieved requires continued exchange rate flexibility, an appropriately tight monetary policy, and financial discipline, in parallel with accelerating structural reforms.
In the debt file, this means improving debt management and gradually moving to longer-term, more market-based financing, expanding the investor base and deepening the local debt market, thus reducing refinancing risks and supporting debt sustainability.
But the Fund places state ownership reforms and asset divestment at the forefront of the reforms required to create more space for the private sector.
Matei and Kornienko say that “more decisively implementing the state ownership policy and divestment programme,” along with improving the governance of state-owned enterprises and enhancing competition, will be crucial to reducing state presence and creating conditions for stronger private sector-led growth.
Stronger steadfastness...but the mission is not finished
The recent experience reveals an important change in the Egyptian economy’s ability to deal with shocks. The markets faced a large capital outflow and a sharp decline in the currency, but reserves, exchange rate flexibility, and the speed of the government response prevented the financial turmoil from turning into a broader economic crisis.
However, this improvement does not eliminate structural challenges; High debt and financing needs, short maturities, the banking sector’s connection to public finance, and the expansion of the state’s presence are all factors that make continued resilience linked to the speed of implementing reforms.
Thus, the next challenge for Egypt is not only to absorb the next shock, but also to reduce the need to manage shocks by addressing the vulnerabilities that make the economy more vulnerable to them.
IMF estimates say that building on the gains achieved requires maintaining macroeconomic stability, in parallel with more decisive reforms that open the way for private sector investment and support more sustainable growth.
Shares of some Chinese companies listed in Hong Kong and the United States face short-term risks as a deadline approaches for paying taxes on assets and income linked to offshore trust funds, in a move that prompts wealthy people and large shareholders to reconsider their wealth management structures outside China.
Bank of America Securities believes that the new rules may lead to pressure on the shares of certain companies if major shareholders are forced to sell part of their holdings to provide the necessary liquidity to pay tax obligations, although this issue is unlikely to turn into a major factor determining the direction of the entire Hong Kong market.
The Chinese authorities announced in July that they would impose an individual income tax on assets placed in offshore trusts and on the income they generate, giving taxpayers 90 days to settle the unpaid taxes.
The deadline expires on October 22, which puts the markets before a monitoring period extending for about a month to determine the actual size of the obligations and the way major investors deal with them.
Private companies listed abroad may be more vulnerable to scrutiny, while the measures are likely to have less impact on state-owned companies, said Winnie Wu, China equity strategist at Bank of America Securities.
The issue is important because offshore trusts have been widely used by wealthy Chinese, company founders and large shareholders to manage assets and investments. As authorities tighten tax collection rules, these structures are facing a new test that could change the way Chinese investors keep their wealth abroad.
Market fears emerged clearly this month after a major shareholder in the Chinese restaurant chain “Haidilao” suddenly sold 259 million shares, achieving liquidity of 2.75 billion Hong Kong dollars, or about 351 million US dollars.
Since the sale, the company's shares have fallen by about 17 percent, raising questions in the market about whether the need to provide liquidity to pay taxes could prompt major shareholders in other Chinese companies to carry out similar sales.
The reports did not directly link the sale of Haidilao shares to specific tax obligations, but its timing and size contributed to increasing investors' sensitivity to any large exits before the deadline expires.
The Oct. 22 deadline will give the market a chance to assess the real impact of the new rules, Wu said, adding that tax collection from offshore funds may create "event risk" linked to individual stocks, but will likely not be the primary driver of the Hong Kong market.
One of the main issues is the scale of potential liabilities. Some accumulated taxes may be so high that it makes it difficult for asset owners to provide the funds necessary to pay them immediately, especially if the majority of their wealth is held in the form of stocks or other illiquid assets.
Wu believes that there is room for company owners and shareholders to negotiate with local tax offices regarding the settlement of obligations, given that their demands to provide large amounts of cash within a short period may be unrealistic.
At the same time, the campaign indicates a broader shift in China's dealings with foreign wealth, as it pushes the wealthy to review the structures of trust funds and the way their investments and holdings are distributed.
For stock market investors, the weeks leading up to the October 22 deadline will be a subject of special monitoring. The risk does not necessarily represent a widespread wave of selling, but rather the emergence of sudden sales from major shareholders in specific companies, which could lead to sharp fluctuations in their prices.
Thus, the tax collection campaign is turning from a wealth management issue into a new factor that must be taken into account when evaluating some Chinese stocks listed abroad, while the size of the settlements and the way the authorities implement the rules will determine whether their impact will remain limited to individual cases or extend to a broader segment of the market.
