Egypt’s local debt had been off limits to most international investors for years amid fears over currency devaluations, deeply negative rates and concerns about repatriating funds from a country gripped by severe dollar shortages.
But long-sought reforms – and key cash infusions – spurred international investors to buy more than $800 million in government T-bills this week, a move that could pave the way for their return to government bonds.
“We are constructive short term, because they’ve delivered pretty much everything apart from a cabinet reshuffle,” said Polina Kurdyavko, head of emerging markets at BlueBay, whose firm bought Egyptian government T-bills, for the first time in roughly five years, at the Thursday auction.
Over just two weeks, a $35 billion United Arab Emirates investment deal and an enhanced $8 billion loan from the IMF that followed a 600-basis point interest rate hike and foreign exchange shift, have placed the North African country’s local fixed income market back in the limelight.
Late on Thursday, credit rating agency Moody’s revised its outlook on Egypt to positive from negative citing “significant official and bilateral support” and “policy steps taken in the past week,” while affirming a Caa1 rating that still considers the sovereign a very high credit risk.
“The UAE news kind of took everyone else by surprise and … turned sentiment in the positive, given the scale of the funding provided,” Kurdyavko said.
T-bills, government debt that has a shorter maturity than bonds, can be first test for investors keen to get involved – but who want to make sure the reforms last.
Joe Delvaux, portfolio manager at Amundi, Europe’s largest asset manager, said his firm was “certainly considering” going back into Egypt’s local fixed income markets.
“It certainly has been a very positive momentum for Egyptian policy makers, for the country, for the economy that all these things have come together,” he said.
Wall Street bank JPMorgan also recommended buying one-year Egyptian T-bills.
“The Egypt carry trade is back in focus and this time should be different,” the bank’s Gbolahan Taiwo wrote in a note to clients.
While the central bank does not publish data on foreign participation in the auction, figures supplied by a banker showed that international investors, taking part following long absences, snapped up $825.2 million.
Recent events had revived “the near-term investment thesis in Egyptian risk assets,” Farouk Soussa at Goldman Sachs told clients in a note published on Thursday.
Wednesday’s devaluation was Egypt’s fourth in two years. But policymakers’ previous pledges to allow a more flexible exchange rate faded as soon as pressure on the pound flared up.
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This time, analysts said the sheer size of the financing from official and private sector lenders could bolster the reforms.
Egypt already received $10 billion from the United Arab Emirates for the Ras al-Hikma property development deal and is converting another $5 billion in existing deposits as part of the agreement. The IMF’s latest staff-level agreement on the combined first and second review is expected to be signed off before month-end by the fund’s executive board, triggering another cash windfall.
The country’s geopolitical significance bolstered its case for support, especially in the wake of the Oct. 7 Hamas attack on Israel and subsequent war.
“Egypt’s strategic importance has been reaffirmed for both regional partners such as the GCC sovereigns (especially the UAE and Saudi Arabia) and also Western nations, a clear factor in the recent commitments of support,” said James Wilson, EM sovereign strategist at ING.
Having slumped to a record low beyond 50 to the U.S. dollar on Wednesday after the central bank announced its measures, the Egyptian pound has since held steady at around 49 to the dollar, LSEG data showed.
Goldman Sachs calculated the latest devaluation had taken the real effective exchange rate – a commonly used measure of a currency’s value – some 40% below its long-run average, delivering a larger devaluation than any of the previous adjustments.
In the near term, the currency could appreciate to the low 40s, the bank added, taking away some risk for investors holding the assets.
Meanwhile, one-year T-Bills at Thursday’s auction had a weighted average yield of 32.303% – a clear mark up for investors over the 29.9% yield comparable notes offered in secondary market trading, according to LSEG data.
But not everyone is quite so bullish. JPMorgan only just excluded Egypt’s government bonds from its influential GBI-EM emerging market government bond index, effective Jan. 31, over material FX convertibility issues.
“Clearly the level of the pound was wildly unsustainable and the devaluation is welcome,” said Paul McNamara, investment director at GAM Investments.
“The improvement in the external balance means that this devaluation/rate hikes combination can potentially be sustained; so like most investors – I suspect – we’ll be waiting for signs of a will to follow through before getting involved.”
($1 = 49.3000 Egyptian pounds)
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Reporting by Karin Strohecker, additional reporting by Jorgelina do Rosario, Marc Jones, Rodrigo Campos and Libby George; Editing by Kirsten Donovan, Jamie Freed and David Evans
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