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Sunday, 22 January 2023

Higher yields + a weaker EGP have foreign investors looking at Egypt

Higher yields + weaker EGP could bring foreign investors back to the market: Foreign investors who sold out of Egypt last year are once again looking at Egypt’s debt market on the back of a cheaper EGP and record yield, Bloomberg writes. The spread between most EGP treasury bills and other emerging-market debt last week widened to its highest on record, while authorities’ commitment to a flexible exchange rate has removed some of the currency risk and made EGP more attractive to foreign investors, the business newswire reports.

Inflows have picked up this month after the central bank allowed the currency to depreciate further against the greenback. Some USD 925 mn entered Egypt’s foreign exchange market in the three days following the devaluation on 11 January, which saw the EGP fall to a record low of 32.20 against the greenback during trading before rebounding.The EGP has continued to slip slightly against the USD in the days since and closed last Thursday at some 29.89 against the USD, according to the official central bank rate.

Conditions are improving: “After holding an underweight position for much of 2022, I finally see the conditions for re-entering the local market,” an analyst at Columbia Threadneedle Investments told Bloomberg. Columbia Threadneedle believes that the EGP is up to 25% undervalued when measured by its real effective exchange rate. “It does feel like we are closer to the end of the FX devaluation process now than the beginning,” said a fund manager at Fidelity International. “We can expect demand to resume, especially in an environment where global inflation, global yields and the USD are all now pushing lower.”

More to be done? “With inflation spiking to close to 30% in the coming months and no FX anchor given the change in regime, we still think the CBE has to show more mettle,” a London-based portfolio manager at FIM Partners said. The central bank has raised interest rates 800 bps over the last year, pushing its key rate to 16.25% — its highest level since early 2019. Others say the EGP still has further to fall against the greenback before they are ready to re-enter the market, with Deutsche Bank among those predicting the EGP to weaken further to USD 33 before it stabilizes.

The state has been trying to bring investors back to the country to quell a foreign-currency shortage. Investors pulled some USD 22 bn from EGP-denominated debt between March and September last year on the back of the war in Ukraine, tightening financial conditions, and soaring inflation, which pushed real interest rates deep into negative territory.

FX shortage in the rear-view mirror? President Abdel Fattah El Sisi presented the USD shortage as a thing of the past over the weekend in a speech (watch, runtime: 3:42) aimed at reassuring the public amid soaring prices. “We had an issue securing USDs over the past couple of months … but at the moment we have no issues related to the USD,” El Sisi said, defending his government’s record on the economy. “Things are hard but thankfully we have them under control and we will be able to surpass them and move forward together,” he said.

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