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Sunday, 12 September 2021

Egypt can withstand a US taper, says Maait

Egypt should be able to cope if US interest rates rise as the Federal Reserve begins unwinding its covid stimulus programme, Finance Minister Mohamed Maait told Bloomberg last week in a TV appearance (watch, runtime: 18:47). Policymakers are “closely monitoring” the potential effects of rising US rates on Egypt’s borrowing costs, he said. “We have to be ready, always.”

Egypt has plenty of experience with emerging-market volatility: “We are taking into consideration our experience with such a situation,” the minister said, telling the business information service that more than USD 20 bn has left the country during volatile moments in global markets over the past three years. Egypt, like other emerging markets, saw sell-downs prompted by the Taper Tantrum of 2013, the EM Zombie Apocalypse of 2018, and last year’s risk-off in global EM in March through May as the covid-19 pandemic unfolded.

All eyes on the Fed: Fed chair Jerome Powell suggested last month that the bank could begin to scale back its USD 120 bn per month bond-buying programme before the end of the year should it see further improvements in the labor market. A unexpectedly poor jobs report last month has since cast doubt on when the Fed will actually start tapering, but 70% of economists recently surveyed by the Financial Times still expect an announcement either in November or December, while more than 70% think the central bank will have to start hiking interest rates far earlier than currently expected, in 2022 rather than in 2023.

Egypt’s high real interest rate will provide an extra buffer against rising US rates, S&P Global Ratings said in a recent report. “Compared with some other emerging markets, we think Egypt may fare somewhat better in the event of US interest rate hikes, mainly due to high real interest rate,” the ratings agency wrote.

But Egypt is still at risk of seeing outflows if countries with lower risk profiles start tightening policy, particularly given its cost of borrowing, which is among one of the highest in the world, S&P warned. The ratings agency said that the government will need to draw more of its funding from equity sources and lessen its dependence on the debt markets to lower these risks.

The government is currently working to lower its debt costs by decreasing reliance on short-term debt in favour of longer-term debt, and diversifying its funding sources to include eurobonds, sovereign sukuk and green bonds.

Debt service accounted for 36% of budget spending as of June, down from 40% last year, Maait told Bloomberg, saying that the government aims to cut that figure to 32% by the end of June 2022. Debt service will account for almost a third of government spending according to the FY 2021-2022 budget, rising more than 2% to EGP 579 bn.

More debt issuance coming: Maait said that the country could issue USD or euro-denominated bonds — and could sell more green bonds before the end of the fiscal year. Egypt also hopes to issue its first sovereign sukuk bond in the first half of 2022, according to Maait, who said the size of the issuance could range between USD 500 mn and USD 700 mn.

The IMF has warned about the possible effects of a Fed taper on emerging markets: Chief economist Gita Gopinath said last month that EMs whose balance sheets are stretched due to covid-19 could see significant damage to their economies. “[Emerging markets] are facing much harder headwinds,” she said. “They are getting hit in many different ways, which is why they just cannot afford a situation where you have some sort of a tantrum of financial markets originating from the major central banks.”

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