Egypt Devaluation Risk, IMF Wait Are Dealbreakers to Bond Buyers

Netty Ismail
·3 min read

(Bloomberg) --

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Egypt’s struggle to win back investors to local debt is adding urgency for the government to reach a deal with the International Monetary Fund.

With external capital markets all but closed, the lack of demand has shuttered one of its main sources of funding it has left at home. Sales of local-currency bonds slumped 38% this year through August from the same period in 2021 to the equivalent of just over $81 billion, according to data compiled by Bloomberg.

“It likely accelerates their need to agree a new funding program with the IMF,” said Paul Greer, a London-based money manager at Fidelity International, who is underweight on the pound and local debt.

Egypt’s debt market could become the next pressure point as the government scours the world for investments following energy and food shocks from Russia’s invasion of Ukraine. Just over five months after the nation devalued its currency, the pound remains expensive and investors are bracing for a second wave of depreciation, with the IMF favoring a more flexible exchange rate.

Moody’s Investors Service said in June it expects the IMF to finalize a new program of $4 billion to $6 billion in the second half of this year to help Egypt fund an estimated current-account deficit of 5.4% of gross domestic product.

Saudi Arabia and Egypt’s other wealthy Gulf Arab allies have together pledged more than $22 billion in deposits and investments in recent months to shore up the economy of a country viewed as a linchpin in the Arab world.

Talks with the fund are moving in a “reassuring” direction, though the amount of aid the IMF could provide to Egypt has yet to be decided, according to Finance Minister Mohamed Maait.

Foreign portfolio investors have already pulled about $20 billion from the local debt market since the start of this year, with the pound at the weakest since its 2016 devaluation. This year’s issuance through August is less than half the record $192 billion raised in all of 2021.

Investors have gravitated toward less risky options as Egypt seeks to avert a debt crisis. Issuance of three-month Treasury bills has jumped, while sales of bonds with maturities of more than a year have been declining.

It’s a reversal of fortune for the one-time darling of emerging markets. Drawn to Egypt’s high interest rates, a stable pound and its track record of market-friendly moves, foreigners had pumped billions of dollars into its debt market and reaped outsized returns.

This quarter, however, Egypt’s local-currency debt is one of the six worst performers in emerging markets, according to Bloomberg indexes.

To attract buyers, Egypt has had to raise the yields on its Treasury bills by the most since 2016. Still, a gauge of demand for 12-month securities signaled investor appetite was still weak.

Currency, Rates

A leadership shakeup at the central bank last month only served to raise the stakes for investors after the replacement of Tarek Amer, who as governor was seen as supportive of a stable pound.

Should the central bank allow for a weaker currency, it will feed into price pressures that have already pushed Egypt’s inflation-adjusted rates below zero. That in turn will raise expectations for tighter monetary policy ahead.

Egypt’s real rate, once the world’s highest, has now shriveled to minus 2.35% -- at a time when the US Federal Reserve and most other central banks around the world are aggressively raising borrowing costs.

Derivatives traders are pricing in further declines in the pound, even after Egypt’s currency posted six months of losses in the offshore market.

“Another 20% devaluation combined with a further 300-to-400-basis-point rate hikes and clarity on the policy outlook would get me interested in the local trade again,” said Gordon G. Bowers, a London-based analyst at Columbia Threadneedle Investments. “These moves would help restore the real rate buffer, improve competitiveness and re-balance the external accounts.”

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