Egypt’s struggle to win back investors in local debt is increasing the urgency of the government’s deal with the International Monetary Fund.
With external capital markets almost closed, the lack of demand has shut down one of the main sources of funding it has left at home. Sales of local currency bonds fell 38 percent this year through August from the same period in 2021, to the equivalent of just over $81 billion, according to data compiled by Bloomberg.
“It probably accelerates their need to agree a new financing program with the IMF,” said Paul Greer, London-based fund manager at Fidelity International.
Egypt’s debt market could become the next pressure point as the government looks for investment after energy and food shocks from Russia’s invasion of Ukraine. Just over five months after its currency was devalued, the pound remains expensive and investors are bracing for a second wave of devaluation, with the IMF favoring a more flexible exchange rate.
Moody’s said in June it expected the IMF to finalize a new $4 billion to $6 billion program in the second half of this year to help Egypt finance an estimated current account deficit of 5.4 percent of gross domestic product.
Saudi Arabia and Egypt’s other wealthy Arab allies in the Gulf have jointly pledged more than $22 billion in deposits and investments in recent months to support the economy of a country considered a pivot in the Arab world.
Talks with the Fund are moving in a “reassuring” direction, although the amount of aid the IMF could provide to Egypt has yet to be decided, according to Finance Minister Mohamed Maait.
Foreign portfolio investors have already pulled about $20 billion from the local debt market since the start of this year, with the pound at its weakest point since devaluation in 2016. This year’s issuances through August are less than half of the record $192 billion raised throughout 2021.
Investors have turned to less risky options as Egypt tries to stave off a debt crisis. Issuance of three-month interest-bearing Treasury bills has skyrocketed, while sales of bonds with maturities of more than one year have declined.
It is a reversal of fortunes for the one-time darling of emerging markets. Attracted by Egypt’s high interest rates, stable pound and history of market-friendly moves, foreigners had poured billions of dollars into its debt market and reaped exorbitant returns.
This quarter, however, Egypt’s local currency debt is one of the six worst performers in emerging markets, according to Bloomberg indices.
To attract buyers, Egypt has had to raise its government bond yields by the most since 2016. Still, a gauge of demand for 12-month bonds signaled investor appetite remained weak.
A change in central bank leadership last month only served to raise the stakes for investors after the replacement of Tarek Amer, who as governor was seen as a supporter of a stable pound.
If the central bank allows a weaker currency, it will fuel price pressures that have already pushed Egypt’s inflation-adjusted interest rates below zero. This in turn will raise expectations for tighter monetary policy in the future.
Egypt’s real interest rate, once the highest in the world, has now shrunk to minus 2.35% – at a time when the US Federal Reserve and most other central banks around the world are aggressively raising borrowing costs.
Derivatives traders are pricing in further declines in the pound, even after Egypt’s currency posted six months of losses in the offshore market.
“Another 20% devaluation combined with further rate hikes of 300-400 basis points and clarity on the policy outlook would make me interested in local trade again,” said Gordon G. Bowers, analyst at Columbia Threadneedle Investments with based in London. “These moves would help restore the real interest stock, improve competitiveness and rebalance external accounts.”
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