Fresh funding from the IMF will help boost investor confidence in Egypt as portfolio outflows from emerging markets begin to reverse, Fitch Ratings said on Thursday. The government received last week a USD 2.8 bn rapid financing instrument (RFI) and is looking for as much as USD 5.5 bn under a separate stand-by arrangement (SBA) from the international lender.

This comes as Egypt’s risk indicators are “moderating” and yields on USD-denominated bonds begin to cool off. Yields on 10-year USD bonds dipped to 8-8.5% in early May from 12% in mid-March.

“Monetary and fiscal policy will play an important part in how Egypt weathers the crisis and in any agreement on an SBA with the IMF … An SBA is likely to bring renewed focus on exchange-rate flexibility, especially if foreign reserves remain under pressure. The EGP, which appreciated by 11% against the USD in 2019, has shown minimal volatility so far in 2020, despite the shock,” the ratings agency says. Fitch expressed its concern that the lack of volatility in the currency could limit renewed portfolio inflows.

Fitch expects Egypt’s gross foreign reserves to dip to USD 31 bn by the end of the year, which would be enough to cover 4.5 months of external payments. Net reserves fell in April for the second consecutive month to USD 37 bn as the Central Bank of Egypt (CBE) honored USD 1.6 bn-worth of external obligations — including a USD 1 bn eurobond that matured last month — and provided an undisclosed sum of FX to back the purchase of strategic goods. Nonetheless, the CBE’s gross foreign reserves “are still substantial.”