Investors and analysts are sounding the alarm that Tunisia and Egypt are on the brink of a major debt crisis that could affect the troubled North African region and put Gulf states in front of tough choices.
Countries already face several challenges due to commodity shortages and financial market imbalances. Tunisia is also witnessing a political crisis caused by President Kais Saied's tightening grip on power and cracking down on dissent.
There has long been a long-held belief that Egypt is too big to be allowed to collapse, North Africa's largest and most populous economy. But Tunisia is also important as the birthplace of the Arab Spring and is supposed to be the only success story in the region's uprisings.
The case of Tunisia
Tunisia still hopes for long-awaited support from the International Monetary Fund, although concerns persist about its commitment to any program amid political division.
Kais Saied criticized the IMF, saying Tunisia would not bow to what he described as diktats about cuts in food and energy subsidies and the public sector wage bill, warning that this could lead to renewed social unrest.
Matt Vogel, emerging market asset manager at FIM Partners, said: "In light of current policies, we have to wonder whether any IMF program will survive the first or second review."
But without sustained IMF assistance, the country will face a full-blown balance-of-payments crisis, observers say.
Tunisia pays one of the highest public sector wage bills in the world, meaning the fiscal deficit will remain at around 5 percent of GDP, JPMorgan estimates.
Morgan Stanley warns that foreign exchange reserves will not be enough to cover commodity imports for two months even at this time next year given the current rate of withdrawal from those reserves.
Repaying debt may become an almost impossible task. Most of the country's loans are domestic, but they must repay a 500 million euro foreign loan in October and another in February.
Matt Robinson, senior analyst at Moody's, warns: "There is always the possibility that the IMF program will be delayed so long that when it comes it is too little and too late."
On the risk of default, Robinson said: "This could happen eventually. That's what our low rating indicates."
The pound lost 50% after depreciating its value 3 times in almost a year (Al Jazeera)
What about Egypt?
Egypt's public finances are under pressure, despite agreeing a $3 billion bailout program with the IMF in December.
The debt-to-GDP ratio is fast approaching 100 percent, with the pound losing 50 percent after depreciating 3 times in almost a year, meaning that interest payments on debt alone — much of which is borrowed in dollars, euros or yen — will swallow up more than half of the government's revenues next year, according to Fitch.
Fitch downgraded Egypt's credit rating again on Friday. The shortage of dollars in the local currency markets is severely hurting the economy.
The dollar is now trading at more than 40 pounds in the parallel market, about 25% higher than the dollar's official exchange rate, despite repeated devaluations and interest rates that jumped to 18.25%.
Many economists believe interest rates will rise well above this level, all to support a controversial economic vision ahead of next year's presidential election.
David Pater, associate fellow in the Middle East and North Africa programme of London-based Chatham House, said: "For the population, in the period until the pandemic there was a marginal improvement in living standards.
"But since late 2021, we have returned to this spiral of exchange market instability and hyperinflation."
President Abdel Fattah al-Sisi's government denies any talk of default. To fill funding gaps, it aims to sell $2 billion in state-owned assets by the end of June.
This is a crucial step both for the IMF, which expects the sale to cover nearly half of the $17 billion funding gap over the next four years, and for allied Gulf states, which have backed the country with a lot of money.
Those countries are now taking a tougher stance, which analysts attributed to regional policies and differences over the valuation of which assets will be sold, despite some positive statements.
Central Bank of Egypt (Al Jazeera)
Significant consequences
For asset management firms, there has been a painful 20 percent drop in the value of Egyptian international bonds, which are close to $30 billion this year.
Suez Canal revenues and tourism revenues are improving, but Cairo must pay $5.8 billion of the bond's principal value and interest due next year, with those bonds weighing 2 percent in the most watched emerging market debt indexes.
Carl Ross, an emerging market crisis expert at GMO Asset Management, says Gulf states will have to weigh the cost of supporting Egypt against the risks of regional instability in the event of the collapse of the country of 110 million people.
"If there is a default, it won't go without major consequences," Ross said.