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Sunday, 3 October 2021

How will Egypt fare when the Fed starts to taper?

Egypt is among emerging markets that are bracing for the Fed taper: Emerging-market debt — including Egyptian bonds and T-bills — could become less attractive to foreign investors after the Federal Reserve last month hinted that it could start to wind down its asset-purchase program in November and raise interest rates as soon as next year. A tighter US policy could leave emerging markets vulnerable to a drop in foreign inflows as risk-averse managers seek safer returns in the US. That said, Egypt’s strong foreign reserves, fast-growing economy, and a switch to longer-term maturities in recent years mean Egypt is best-placed among EM to weather a potential storm. Bloomberg has a full, chart-based rundown of the strengths and pressure points to watch out for as Egypt’s fixed-income market transitions into the post-covid-recovery economy.

High real rates mean high inflows — and greater exposure to volatility: Egypt offers one of the world’s highest inflation-adjusted rates, leading to a boom in foreign holdings of Egyptian debt, which hit a record USD 33.3 bn at the start of August, Bloomberg writes. High inflows have helped the state finance spending — but a reliance on foreign investors leaves us vulnerable to volatility in the fixed-income markets, while elevated rates mean the cost of debt service is also comparatively high. A hike in global rates may see Egypt pressured to pay out higher yields to stem the outflows.

We’re positioned to avoid the worst of an EM sell-off: Historically, global rate movements haven’t had much impact on the local picture, Shamaila Khan, head of emerging-market debt at AllianceBernstein in New York, told Bloomberg. “If other emerging markets are pressured, I would expect Egypt to still perform well on a relative basis,” she said. On debt service, S&P said the government has made “notable progress” in lowering the burden. The proportion of the state budget allocated to debt service was down to 36% as of June from 40% a year before, with a target of 32% by June 2022, Finance Minister Mohamed Maait has said. Meanwhile, a turn toward offering longer-term debt instruments — the average maturity has doubled since 2013 to reach 3.26 years — may help insulate the country from a shock sell-off.

Strong FX reserves are key: Net international foreign exchange reserves have held fast at USD 40.7 bn, creating “good buffers to deal with any potential capital outflows,” said Ahmed Hafez, MENA head of research Renaissance Capital, who added that the improving real economy — including tourism — will also help bolster Egypt’s position.

Real economic growth is outpacing the rise in debt: GDP continued to rise during the pandemic, albeit at a slower pace than before, proving the country’s resilience as developed nations and peers in the oil-reliant Gulf took a harder hit. The economy grew at a 3.3% clip in the 2020/2021 fiscal year, with a target to rebound to pre-pandemic growth levels of 5.5% this FY. Strong growth has tempered the impact of rising debt: while the debt-to-GDP ratio ticked up as the result of the pandemic to 90.6% in June 2020 from 87.4% a year before, it is expected to return to a years-long declining trend come 2022.

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