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North Africa Nations' Debt Deepens

FILE: A man counts Egyptian currency at an exchange office in Cairo. Taken Nov. 3, 2016.
FILE: A man counts Egyptian currency at an exchange office in Cairo. Taken Nov. 3, 2016.

LONDON - Tunisia and Egypt are edging closer to major debt crises which could suck in a volatile North Africa region and pose tough choices to wealthy Gulf Arab neighbors, investors and analysts warn.

The countries are already being challenged by shortages of essential goods and financial market dysfunction and in Tunisia's case, a political crisis caused by President Kais Saied's consolidation of power and crackdown on opponents.

Egypt, as north Africa's largest economy and most populous nation, has long been assumed to be too big to be allowed to fail, but Tunisia too carries outsized significance as the birthplace - and supposed sole success story - of the Arab Spring.

Tunis' hopes for a long-awaited International Monetary Fund (IMF) support are still flickering, although concerns remain whether it would stick to a program given the fractured politics.

Egypt's finances also look stretched despite it securing a $3 billion IMF rescue plan in December.

President Saied has criticized the IMF, saying Tunisia will not bow to its "Diktats" on food and energy subsidy cuts and a reduction in the public wage bill, warning it could fuel renewed social upheaval.

"Given the current politics, you have to question whether an IMF program would even survive a first or second review," said Matt Vogel, at emerging and frontier market asset manager FIM Partners.

Without sustained IMF help, though, the country faces a full-blown balance of payments crisis.

Making debt payments could become almost impossible. Most of the country's borrowings are domestic, but it has a 500 million euro foreign loan repayment in October followed by another in February next year.

Egypt's debt-to-GDP ratio is fast approaching 100% and three major currency devaluations totaling 50% in little over a year means the interest payments on its debt alone - a large slab of which is borrowed in dollars, euros or yen - will soak up over half of the government's revenues next year according to Fitch.

The rating agency, which downgraded Egypt's credit rating again on Friday, highlights that only default-stricken Sri Lanka would need to pay more. And like that example, a lack of dollars in Cairo's local currency markets is biting the economy.

The Egyptian pound now changes hands at over 38 to the dollar on the streets, nearly 20% below the currency's official rate despite the repeated devaluations and interest rates jumping to 18.25%.

Carl Ross, at fund manager GMO, said the wealthy Gulf states would have to balance the cost of supporting Egypt against the risk of regional instability if a country with a 110 million population went bust.

"It would not be immaterial if it were to default" Ross said about the impact on global money managers.