Explainer| How Egypt avoided a dollar crisis during the Iran conflict

The outbreak of the US-Israeli war on Iran in late February triggered immediate concern across Egyptian financial circles. Analysts and investors closely monitored the potential flight of “hot money” from the local debt market, fearing a repeat of the massive capital outflows that precipitated the 2022 dollar crisis.

However, as a truce was declared and the economic fallout was tallied, data suggests that Egypt mitigated the worst of the volatility, with capital flight proving less damaging than initially feared.

How big was the outflow?

Capital flight during the conflict reached approximately $8 billion, according to Moody’s, which has provided the most precise accounting to date of foreign exchange losses triggered by the exodus from Egyptian debt instruments.

The Egyptian Exchange’s (EGX) monthly report, currently the only available source for confirmed secondary debt market data, corroborates this trend. Net international investor sales of listed treasury bills and bonds in March totaled 239.5 billion Egyptian pounds (about $4.5 billion), marking a significant downturn compared to the market’s performance earlier in the year.

Financial expert Mostafa Ismail Hassan told Al Manassa that this exit was a logical response to the pound’s depreciation in March. “Anyone who entered the Egyptian market over the last six months found themselves in a loss position,” Hassan noted. He explained that while the average yield on pound-denominated debt hovered around 30%—implying a 15% return over six months—the currency’s 15% decline against the dollar during the conflict effectively wiped out those gains.

The US dollar reached record highs against the Egyptian pound as energy and essential import costs rose, exacerbated by the exit of speculative capital. Mahmoud Nagla, executive director for money markets and fixed income at Ahly Investments, attributed these outflows to a broader global trend where investors retreated from emerging markets, particularly those near the Middle East conflict zone.

Nagla explained that institutional investors often rebalance portfolios during periods of heightened global risk, reducing exposure to emerging markets in favor of developed economies. EGX data confirmed this, showing that sell orders in March were nearly double the value of buy orders.

Why was the crisis less intense this time?

While the recent pressures were significant, they remained less severe than the crisis following the 2022 Russia-Ukraine war, when foreign outflows from the local debt market exceeded $20 billion.

Allen Sandeep, head of research at Act Financial, told Al Manassa that the slower pace of exit this time was driven by the perception that the conflict would be short-lived. “The general view was that the conflict and its repercussions were temporary; consequently, outflows represented only about one-fifth of total foreign investment,” Sandeep said.

According to Central Bank of Egypt data from September 2025, the total foreign holding of treasury bills stood at 2.1 trillion pounds (about $40 billion), out of a total investment of 5.1 trillion pounds (about $97 billion).

Hassan further attributed the resilience to the adoption of a flexible exchange rate. Unlike in 2022, the absence of rigid currency controls prevented the emergence of a parallel market. This allowed banks to respond more efficiently to dollar requests, reducing investor panic.

Paradoxically, foreign exchange reserves rose to $52.8 billion during the crisis. Experts point out that the government relied primarily on the banking sector to cover foreign exit requests rather than depleting central reserves, which bolstered confidence in the local currency. Sandeep argued that Egypt’s ability to avoid a major crisis serves as a positive indicator for medium-term sustainable growth.

Can foreign capital be attracted back?

Despite the peak of the Iran crisis in March, there was a notable uptick in purchasing activity within the Egyptian debt market, particularly from Arab investors. Will this continue after the truce?

Hassan pointed to the incentives that the Egyptian market offered to new foreign investors during the crisis. Yields on debt instruments rose by approximately 2%, while the pound’s devaluation made local assets cheaper.

He expects a period of relative stability in the debt market, barring a major escalation in the conflict, as most investors seeking to exit have already liquidated their positions.

However, analysts emphasize that regional stability remains the primary prerequisite for lowering risk premiums and attracting fresh capital. “The major issue lies in the war’s progression and the additional pressure it may place on tourism revenues and energy costs,” Hassan said.

International political developments, including statements from influential figures like Donald Trump, remain a key factor in determining short-term market trends, added Nagla.

Even if foreign investment returns, the heavy reliance on hot money remains a structural concern. In a report issued shortly before the conflict, the IMF warned that the large share of foreign holdings in short-term, local-currency-denominated debt represents a significant risk if investors move to sell en masse.