Emerging-market investors are preparing to creep back into Egypt’s local debt market, enticed by a cheaper pound and record yields when compared with peers.
(Bloomberg) —
Emerging-market investors are preparing to creep back into Egypt’s local debt market, enticed by a cheaper pound and record yields when compared with peers.
Egypt’s move to a more flexible exchange rate has revived interest in its local-currency debt, the worst performer in emerging markets last year, according to Bloomberg indexes. That’s after investors pulled $22 billion from the market over some six months in 2022, according to Finance Minister Mohamed Maait.
Now, almost all of the nation’s Treasury bills are at their widest discount ever relative to emerging-market debt, with yields over other developing countries widening to the most on record this week. Attracting foreign investors back to the local debt market is critical for the Arab world’s most populous country, which has been shut out from external capital markets for nearly a year.
“After holding an underweight position for much of 2022, I finally see the conditions for re-entering the local market,” said Gordon Bowers, a London-based analyst at Columbia Threadneedle Investments in London. “I would keep some dry powder available to build an overweight if the currency further overshoots fair value.”
Pound Overshoot
The pound plunged to a record low of 32.1 per dollar this month amid the country’s worst foreign-currency crunch in years. But some will still want to see the currency find equilibrium before increasing exposure.
Columbia Threadneedle Investments says the pound is already as much as 25% undervalued, when measured by its real effective exchange rate, a gauge of a currency’s competitiveness against trading partners.
But it also says the currency may fall even more. Deutsche Bank AG predicts the pound could weaken as much as 10% to 33 per dollar before stabilizing.
One of the world’s largest wheat importers, Egypt was hit hard by the economic fallout from Russia’s invasion of Ukraine last February. Until then, it was a prime destination for volatile hot-money financing because of a combination of a pegged currency and the world’s highest interest rates when adjusted for inflation.
Lately though, authorities have begun questioning the nation’s reliance on that kind of inflows, and as the crisis deepened last year, they introduced what they called a “durably flexible” exchange-rate regime.
A series of devaluations followed, helping Egypt to clinch a $3 billion loan from the International Monetary Fund. With other borrowing options closed off, Gulf allies also pledged more than $20 billion in deposits and investments to help a country they view as vital to regional security and stability.
The last time Egypt tapped international debt markets was in March 2022, when it issued yen-denominated securities, and its last dollar debt deal was in September 2021. The country has $39 billion of eurobonds outstanding, according to data compiled by Bloomberg.
‘More Mettle’
With inflation exceeding 21% in December, Egypt’s central bank may have to raise interest rates further to entice more foreign investment, according to Matthew Vogel, London-based portfolio manager and head of sovereign research at FIM Partners.
“With inflation spiking to close to 30% in the coming months and no FX anchor given the change in regime, we still think the CBE has to show more mettle,” he said.
Meanwhile the gap between the pound’s official rate and the rate on the black market, which emerged as Egyptians struggled to find dollars through official channels, has narrowed. And the logjam at its ports, which added to the backlog of demand for dollars, is improving.
“It does feel like we are closer to the end of the FX devaluation process now than the beginning,” said Paul Greer, a London-based money manager at Fidelity International who is neutral on Egypt’s currency and local debt. “We can expect demand to resume, especially in an environment where global inflation, global yields and the US dollar are all now pushing lower.”
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