Local lenders would have you believe that the Egyptian project finance market is set for an unlikely resurgence. Egyptian bankers seemed surprisingly positive following the military coup that ousted president Mohamed Morsi at the beginning of July. A leader distrusted by the local business community and the increasingly influential Gulf Cooperation Council states was gone and, they claimed, real stability was within reach. According to this narrative, after a short time a new government would be established and a new constitution agreed, and then within months international investment would start to flow back into the country. Recent deadly clashes between Islamist protestors and the army, however, underline how optimistic this outlook appears.

On 12 July, before the new interim government led by Abdel Fattah al-Sisi was even sworn in, the Ministry of Finance was already trying to reassure international investors. Atir Hannoura, head of the ministry’s PPP Central Unit claimed: “The current political turbulence will not affect PPP projects.” The main focus of the unit’s announcement was the E£35.5 billion ($794 million) Abu Rawash wastewater treatment project, which would proceed, it said, as previously planned.

The interim government informed the four shortlisted developers, Orascom/Aqualia/ Veolia/ICAT, Kharafi National, Metito/Hochtief and Degremont, that they should continue to prepare their bids for the 20-year PPP concession, despite the political transition. The project will increase the capacity of Abu Rawash, located in the Giza governorate, from 1.2 million cubic metres (m3) per day to 1.6 million m3 per day, and create a secondary treatment stage to the plant. The unit originally prequalified bidders in 2010, before the revolution that overthrew Hosni Mubarak.

Unsurprisingly, Abu Rawash is not the only Egyptian project to have stalled mid-procurement. A G4S-led consortium won the 20-year concession for the Alexandria hospital PPP in March last year, two years after Egypt prequalified 14 developers for the E£6 billion development.

The government is also attempting to address the need for extra power capacity with three new IPPs: the 2,250 MW Dayrout City plant, the 1,300MW Qena plant, and 1,950MW Beni Suef project. The power tenders are scheduled to launch to market in the next few months. Other pipeline PPP projects include the Suez Canal hospital, the Safaga Port project, 40,000 m3 per day Hurghada (Al Yosr) and 20,000 m3 per day Sharm El Sheikh greenfield water projects, a river bus project in Cairo and a 72km rail link connecting 10th of Ramadan City to Ain Shams.

The unenviable task facing the PPP Unit is lining up foreign debt and equity to complement the existing debt commitments from local lenders to the deals. When asked about raising international finance, one local banker argued that the fall of Morsi would encourage GCC banks back into the country. The coup was the catalyst for $12 billion of external financial support from the governments of Saudi Arabia, Kuwait and the UAE, and the rulers of these countries were clearly glad to see the back of the Muslim Brotherhood-led administration. Qatari debt and equity was key to reviving the Egyptian Refining Company financing in the months after the fall of Mubarak.

Commercial debt will be harder to ensnare however. Regional banks are assessing the pipeline of deals and seriously considering committing to loans, but all insist that decisions would be made on a purely commercial basis, with stability more important than the politics of the government in charge. One GCC banker, who has worked on Egyptian deals in the past, said: “There is limited appetite at present. If appetite was 100% before the upheaval this year, it is probably around 25% now.”

Even if foreign commercial banks were willing to come to the table, they would offer extremely expensive financing. One international lender said that any pricing decision on an Egyptian project would take into account the price of five-year sovereign credit default swaps, which at the time of writing was around 787bp. Sovereign debt costs will directly affect project funding costs because government would be expected to provide some kind of backstop to any future project and many of the local commercial lenders are partly state-owned.

Local banks already hold a significant amount of the country’s sovereign debt, which is estimated to represent around 40% of its GDP. Moody’s maintained its Caa1 rating on Egyptian sovereign debt with a negative outlook following Morsi’s departure, and had downgraded National Bank of Egypt, Banque Misr, Banque Du Caire and Commercial International Bank from B3 to Caa1 in March.

High commercial debt pricing will make development finance institutions and export credit agency debt more attractive to the government and developers. The European Bank for Reconstruction and Development is considering a loan for Abu Rawash and the International Finance Corporation, the financial adviser to PPP Central Unit, is providing debt on Alexandria hospitals. DFIs have small balance sheets, however, meaning ECA support may be needed to raise enough debt to fund the entire of Egypt’s ambitious pipeline.

For ECAs to be involved the PPP and power deal would need to use foreign equipment, but the Egyptian pound began a pronounced decline over the course of 2013. Despite a slight improvement following the ousting of Morsi, the currency is still over E£7 to the dollar compared to E£6.17 at the start of the year. This will increase equipment and hedging costs on any upcoming project. Developers will probably need to raise a vast amount of the required financing from a small group of stretched local banks, unless a new government can quickly bring confidence back to the market.

The establishment of a long-mooted local Islamic bond market could help mitigate these funding issues, and with the Salafist groups that opposed its creation now out of government, that process may become easier. Even if a new government can usher through legislation quickly however, local Sukuks will take time to bring to market. Despite the positivity emanating from the PPP Central Unit and local lenders, it is clear that the immediate concerns for Egypt are foreign exchange and bank funding conditions, rather than infrastructure investment, which will need to wait on improvements to the first two.