Some investors are becoming cautious of Egypt’s lucrative carry

A customer exchanges US dollars for Egyptian pounds at a currency exchange office in central Cairo, Egypt on November 3, 2016. REUTERS / Mohamed Abd El Ghany / File Photo

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  • Central bank says unconventional approach has been successful
  • Investors say short-term exposure could expose Egypt to shocks
  • Net foreign assets fall by $ 3.75 billion in October

CAIRO, December 21 (Reuters) – Some foreign investors are becoming cautious about buying Egyptian Treasuries due to nervousness in emerging markets and the sustainability of high Egyptian yields.

Egypt’s central bank says its unconventional strategy to deal with the coronavirus pandemic has been successful: raising interest rates on domestic deposits, lowering domestic lending rates, and allowing the currency to remain almost unchanged against the dollar.

The stability of the currency and the high yields of treasury bills have led foreigners to buy Egyptian pounds to invest in short term treasury bills only to convert them back to dollars when they mature, thus generating large returns. . A one-year treasury bill auctioned on December 20 brought in 13.25% on average, before income tax of 20%.

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This has made Egypt a favorite among emerging market investors since it embarked on a sweeping reform program under IMF auspices in November 2016. yields, especially if there is another economic shock, said over half a dozen analysts and investors.

“Egypt is generally perceived by the markets as being more vulnerable in a rising interest rate environment (globally) given its significant financing needs and its heavy dependence on the carry trade,” said Farouk. Soussa, economist at Goldman Sachs.

Foreigners held 378.2 billion Egyptian pounds ($ 24.1 billion) in treasury bills one year or less at the end of September, a historic high, according to the latest central bank figures.

“We have seen some unwinding of positions in recent weeks, in part due to waning risk appetite in emerging markets, in part due to concerns about Egypt’s external sustainability,” Soussa said.

Yield of the one-year banknote in Egypt


Viktor Szabo, portfolio manager at abrdn, said the issue is not whether funds will flow out of Egypt, but how Egypt will meet large future funding needs.

“The key question is whether they are willing and able to hold the exchange rate, because that is why this has been the most sensational trade for emerging markets – because they have kept the exchange rate stable. and paid extremely high rates on their bonds. “

Other than a brief depreciation at the start of the first few months, the Egyptian pound has remained largely unchanged throughout the pandemic at around 15.70 against the dollar.

“We did not treat currencies in the normal way,” Central Bank Governor Tarek Amer said this month. “Most central banks have witnessed a sharp devaluation of their currencies – 20%, 15% or 30%,” adding that monetary authorities believed that a weaker exchange rate would not bring tourists back or stimulate exports.

“We came in with a substantial amount of caveats, and we made sure that foreign investors – and it’s our philosophy that we don’t want them to lose – don’t lose money when they exit, which was substantial, ”Amer said. during a videoconference from the Central Bank of the Middle East.

“All the central banks cut interest rates. We raised the (domestic) deposit interest rate. We created something a little unusual, but it worked,” Amer said.

Proof of success, the government announced annual economic growth of 9.8% during the July-September quarter, against 0.7% a year earlier.

Egypt net foreign assets


Yet Egypt’s net foreign assets – dollars and other currencies held by Egyptian commercial banks and the central bank – fell by 58.7 billion Egyptian pounds, or $ 3.75 billion, month on month in October. , at 114.19 billion pounds, according to the latest central bank data, their lowest in the months following the start of the pandemic in early 2020.

This may have been caused in part by the maturity of external bonds, including a $ 2 billion loan from Gulf banks in recent months, refinanced and increased only after a spread, bankers and analysts said.

The current account deficit, which widened to $ 5.13 billion in the April-June quarter from $ 3.83 billion a year earlier, is expected to remain a drain on resources. Read more

The government has also been aided by billions of dollars in pandemic-related loans from the International Monetary Fund, the World Bank and other institutions, helping to finance the current account deficit that grew after a collapse in tourism.

She also sold cheaper Eurobonds. In September, he sold six-year bonds at 5.8%, according to a document from one of the banks involved in the transaction.

“Egypt has become too dependent on portfolio flows from non-residents,” said Shikeb Farooqui, senior macro-strategist at emerging market-focused asset management firm Emso. “High external financing needs and erosion of external buffers expose Egypt to global shocks.

($ 1 = 15.6925 Egyptian pounds)

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Report by Patrick Werr; Additional reports by Karin Strohecker and Aidan Lewis; Editing by Susan Fenton

Our Standards: Thomson Reuters Trust Principles.

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