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Monday, 24 May 2021

What do net foreign assets in banks tell us about capital inflows?

EXCLUSIVE- Foreign investment in local treasury bonds and bills may have dipped in March after having hit a record high in February, say analysts and capital market experts we spoke to. Recent CBE figures revealed a 13.7% m-o-m drop in the net foreign assets (NFAs) in Egypt’s banking sector to USD 17.70 bn, and this is directly related to foreign portfolio investments (FPI), they tell us. FPI had reached a record high of USD 28.50 bn at the end of February, climbing back above pre-covid levels following a 60% drop between March and May last year due a covid-19 sell off.

This shouldn’t come as a surprise since some volatility was expected, especially after the uptick in US treasury yields that began earlier this year translated into higher borrowing costs and made debt investments in emerging markets less attractive, CI Capital senior economist Sara Saada tells us. Another reason Saada’s firm had penciled net portfolio outflows in March is that the demand for imports into Egypt and hard currency was elevated as we headed into Ramadan, which meant there was less of a cushion to mitigate the outflows.

Recent monetary tightening in EMs may have also played a role, HC Securities’ Monette Doss, meanwhile, said. EM central bankers across 37 emerging markets delivered five net interest rate hikes in March, shifting away from an easing cycle, primarily because of the rising US treasury yields and expectations of upward pressure on inflation globally.

But it’s likely only seasonal: The drop was a direct reaction to rising US treasury yields, and it only resulted in volatility, not a sell-off, Saada said. While there were likely outflows in March in response to the increase in the 10-year US treasury yield, inflation concerns, and signs the Fed may hike policy rates sooner than expected, the fall in FPI was a temporary market reaction and not a trend, a senior banker who spoke to us on the condition of anonymity said. We could also see some FPI reflected in April figures, but to a lesser extent than in March, and this should begin reversing in May, they said, adding that FPI is in line for a leg-up further into 2021, when Egyptian bonds become “Euroclearable” and are reincluded on the JPMorgan bond index.

We’re yet to see the latest figures for FPI: Numbers for March and April haven’t been announced, neither through the central bank nor the official government sources that are usually quoted by the local press. We reached out to the central bank for comments on the story but did not receive a reply as of dispatch time.

Good thing US yields are heading in the opposite direction now: US treasury yields have largely been stable since the start of May. The yield on the 10-year note fell slightly this morning to 1.617%, and it has been holding close to this level (which is considerably lower than a 14-month high of 1.776% reached on 30 March) since the start of the month.

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