Why is Saudi Arabia investing $5 billion in Egypt?

Egypt’s cabinet announced last week that Saudi Arabia is set to invest $5 billion into its economy.

For Egypt’s standing in financial markets, the implications were immediately positive, with sovereign bonds rallying to two-year highs. While the amount may not be on the same scale as the UAE’s $35 billion Egypt investment in March, it represents a big shift in stance by Riyadh.

Economic ties between the two nations have lapsed since 2022 when Saudi Arabia declared it would no longer give its allies “free handouts”. However, rather than simply demonstrating returning confidence, renewed interest more likely signals Riyadh wants to boost its influence in Egypt.

“For Saudi, there is a political interest, there is an economic interest, and there is a diversification interest as Saudi Arabia needs to get revenue from sources other than oil and gas in the future,” Matteo Colombo, a researcher at the Clingendael Institute, told The New Arab. 

Crown Prince Mohammed bin Salman instructed his sovereign wealth fund to inject $5 billion into Egypt’s economy in what it called “a first stage”. Little is known about how Egypt will use the proceeds, when the funds will arrive, or what the terms of the investment are, but it is clear the money is more than a free handout as the investment offers Saudi many geopolitical and economic advantages.

From a geopolitical angle, Saudi Arabia may be looking to oust the UAE as Egypt’s main economic partner. Saudi Arabia is engaged in an economic arms race with its neighbour and sometime ally the UAE across Africa and the Middle East. The UAE is Egypt’s biggest economic partner following Emirates’ $35 billion investment into Egypt’s North Sea resort Ras el-Hekma.

As Saudi ramps up the construction of mega-city NEOM, situated along the Saudi side of the Red Sea, the kingdom may look to invest in Egypt’s Red Sea to ramp up its influence on both shores.

Egyptian Prime Minister Mostafa Madbouly said the $5 billion of investments will be in projects that will be decided mutually later on, and it’s worth noting Egypt is attempting to sell land along its Red Sea coast for development projects.

Economically, Saudi Arabia has big exposure to Egypt through past investments and a vested interest in ensuring Egypt’s economic stability. Riyadh may also regard Egypt’s recovering economy as an opportunistic area for investment as it seeks to diversify its revenue.

Geopolitical factors

As the most populous Arab nation with the biggest military power, Egypt has never struggled to attract investment from wealthier Gulf neighbours, even when returns were less than promising. Like its neighbours, Saudi views the stability of Egypt as integral to stability in the region.

“Saudi has an interest to secure Egypt’s stability and development, and this has always been the case,” Colombo said.

“Investments from Saudi Arabia are often politically driven as they come from the state-run Public Investment Fund as opposed to a private company.”

The investment also comes at a time when Egypt is playing a critical role in the Israel-Gaza peace talks. This year Cairo has attracted $57 billion of funds from the IMF, EU, and Gulf allies as both its borders and economy come under pressure from the conflict.

Over half of the $57 billion funding has come from the UAE, and Saudi could be competing with the UAE for influence in Egypt. 

“Saudi and the UAE are sometimes allies and sometimes rivals,” Colombo said. “Saudi Arabia does see Egypt as a place to compete for investment.” 

Similar to the UAE’s investment in Ras al-Hekma, Saudi Arabia may be eyeing a buyout of land for development. Saudi Arabia has been linked to investment in Ras Ghamila, a lucrative plot of land along Egypt’s Red Sea coastline.

Red Sea dominance

The Red Sea, which separates the two nations, is becoming increasingly important to Saudi Arabia as the construction of the $500 billion mega-city NEOM steams on and developers are looking to build coastal resorts along the Red Sea for the millions of foreigners they hope to attract.

NEOM is in southern Saudi Arabia and control of the Red Sea region will be vital to ensure security to the city they hope will become the next Dubai.

“This is a very strategic area for the future, both in terms of attracting foreigners to Dubai 2.0, but also in terms of infrastructure as it’s an area that connects the Mediterranean with the Red Sea and Saudi wants to have a presence to ensure the export of oil and other goods,” said Colombo.

Saudi Arabia bought the islands of Tiran and Sanafir from Egypt in a controversial deal in 2016. The two uninhabited islands are located between Egypt and Saudi Arabia in the Gulf of Aqaba and from a defence perspective are critical for control over the Red Sea.

Egypt is putting five areas of land up for sale along its Red Sea coastline and Saudi Arabia may well extend its physical presence on Egypt’s side of the sea through investment, pitting its new developments directly in competition with UAE’s Ras al-Hekma (Egypt north coast) development and upping its influence in the Red Sea region.

Economic factors

Saudi Arabia’s exposure to Egypt’s economy includes $5.3 billion in bank deposits in Egypt’s Central Bank, according to Central Bank Data, and bilateral debt of $12.6 billion, representing around 8% of Egypt’s external debt.

Dr Hasan Alhasan, Senior Fellow for Middle East Policy at The International Institute of Strategic Studies, suggested that the investment may be a kind of “debt for equity swap” deal in which Saudi is writing off its loans extended to Egypt in the past in return for lucrative assets.

On an opportunistic level, Egypt’s economy is on the rebound. Saudi’s sovereign fund PIF is mandated to diversify its income as part of the kingdom’s shift away from reliance on oil and gas-linked revenue and needs to find strong-performing geographies to invest in. 

“Egypt lately is an attractive region for investment and Saudi has noticed this as a good opportunity to diversify its income,” Colombo said. 

 “The sovereign fund identifies sectors that are the most attractive for them and in Egypt this includes construction, tourism and food security.”

Lara Gibson is a Cairo-based journalist closely following Egypt's economic and political developments.

Follow her on Twitter: @lar_gibson