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Monday, 29 August 2022

Bloomberg beats the drum (hard) on the need for devaluation

Default jitters stalk Egypt, sending traders on a wild ride.” That’s the headline this morning atop the latest from Bloomberg, which has been beating the drum (hard) on the need for devaluation for the better part of a month (“only way is down,” “currency urgency,” and “currency standoff … deepens,” and “shock resignation”). The story is out a little more than a day after Prime Minister Moustafa Madbouly said talks with the IMF on a new facility are in the “final stages.”

While the piece quotes Oxford Economics Africa on the need to “stave off default,” the tone evens out a bit later:

  • Egypt is not Sri Lanka — it has much higher reserve buffers and much better financing options going forward,” said Matthew Vogel, London-based portfolio manager and head of sovereign research at FIM Partners. “Egypt’s problem is manageable with tighter policies and official creditor support.”
  • “The IMF isn’t a make or break default scenario,” said Todd Schubert, head of fixed-income research at Bank of Singapore. “Rather, it would be a confidence builder and be a catalyst for another leg up in pricing to the point that when the EM market does open up, they could conceivably tap the offshore dollar bond markets.”

So should we be concerned? Yup. But is it time to don lifejackets and head for the exits? Nope.

Catch up quick: Egypt’s external position is coming under significant pressure this year thanks to a perfect storm of surging commodity prices, rising interest rates, a red-hot greenback and turmoil in the financial markets. Investors have pulled at least USD 20 bn from the country, the current account deficit is widening, and pressure has built on the EGP to the point that policymakers appear to be accepting that more flexibility is in the cards.

How much debt are we talking about, anyway? The country currently has more than USD 5 bn USD- and EUR-denominated securities to pay off in 4Q 2022 and another USD 9 bn maturing in 2023, according to data compiled by Bloomberg. The business newswire’s emerging-markets economist, Ziad Daoud, has estimated that Egypt will currently need around USD 41 bn to cover debt repayments and its current account deficit through to the end of 2023. Foreign reserves are currently at around USD 33.1 bn.

The probability of the government failing to repay its debt has jumped to its highest since 2013, according to a Bloomberg model. This has caused the spread between Egyptian bonds and US treasuries to rise above 1.2k bps for the first time on record, Bloomberg says, citing JP Morgan data and adding that the cost of insuring against an Egyptian default hit an all-time of 1.5k bps last month, before sliding to 940 bps by the end of last week.

The EGP is down 21.9% since the devaluation in March, slipping further yesterday to 19.24 against the USD and edging closer to a record low. Markets are currently pricing in another 22% decline over the next year.

Absent an IMF facility, FX reserves could stabilize in the near-term: Moody’s Investors Service expects our reserves to stabilize and see a gradual rise on the back of higher non-oil exports and a recovery in foreign inflows. Non-oil exports have already seen a 20% y-o-y increase in the first half of the year to USD 19.35 bn. This comes after foreign reserves declined by almost 20% amid current market conditions.

Rebuilding reserves and addressing FX flexibility are priorities for the new CBE governor: Speculation is growing that the new CBE governor, Hassan Abdalla, will allow the EGP to depreciate further against the USD to ease the pressure. Abdalla’s adviser, banking veteran Hisham Ezz Al Arab, told Reuters just hours before he found out he was being named advisor that he expected Abdalla to go “much faster” currency adjustment than his predecessor Tarek Amer, “not a sudden devaluation like Tarek did, [rather] a faster pace.”

Abdalla’s appointment seems to have calmed the local bond market: Yields on Egyptian three-month treasuries fell for the first time yesterday since May, shedding nearly five points to 16.1% in an auction, which some market participants attributed to Abdalla’s appointment. “The decline, even if it was slight, comes after the meeting of the central bank governor with the heads of banks last week,” one fixed-income trader told Bloomberg Asharq.

Distress is an EM thing right now: Almost a fifth of all emerging market sovereign debt was trading at distressed levels in July. Investors are studying Egypt’s case as a benchmark and indicator for how the rest of the EM debt scene will turn out, Bloomberg writes.

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