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Wednesday, 25 July 2018

Allure of EGP bonds fade, but we are not EM zombie crisis mode yet

While the glint from Egypt’s bonds may have faded, there is still no need to begin preparing a survival bunker for the EM zombie apocalypse, according to a recent report from Capital Economics (we are unable to link to the report for copyright reasons). “The surge in foreign investment into Egyptian bonds and equities that followed the devaluation appears to have faded – in fact, daily data show that foreign investors have been net sellers of Egyptian stocks for the past two months.” Nonetheless, the report notes that we are not yet in crisis mode when it comes to portfolio outflows as the fundamentals — particularly the government’s adherence to the economic reforms — remains strong. “With the government set to stick to orthodox policy making, however, overall capital inflows should hold up well,” notes the report.

As a matter of fact, things may even look good for carry traders down the road, as Capital Economics sees the EGP depreciating over the coming years. “We expect the currency to fall from EGP 17.9 per USD 1 at the time of writing to EGP 19 to the USD by the end of this year and to EGP 20 by end-2019,” says the report.

Monetary easing to continue later this year: The depreciating EGP, coupled with an improving balance of payments and account deficit, should see inflation trend downwards, says the firm. This downward trend is expected to resume later this year, providing scope for the central bank to resume its easing cycle. “We expect the central bank to lower its overnight deposit rate by a further 550 bps by the end of next year,” according to the report.

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