Traders Seeking Refuge From Volatility Will Find It in Egypt

(Bloomberg) -- Egypt has transformed into a haven for debt investors from a crisis zone in less than two years.

The Egyptian pound, which the government allowed to float in 2016 to stave off an economic collapse, has been relatively immune to a rout that sent Turkish and Argentine currencies reeling to record lows. The pound also held its own even as Egyptian Treasury bills suffered outflows of at least $4 billion since March.

Tough measures to stabilize the economy are paying off for the debt market, prompting S&P Global Ratings to raise the nation’s credit rating in May. And while a recent sell-off in the country’s debt may have irked some investors, others, including TCW Group Inc. and Union Investment Privatfonds GmbH., find the currency’s stability and its relatively high yields attractive.

Despite the outflows, “we are encouraged that there were no reports of dollar shortages,” said Brett Rowley, the Los Angeles-based managing director for emerging markets at TCW.

Egypt struggled to attract investments after the 2011 uprising that ousted President Hosni Mubarak triggered years of turmoil. It cut the flow of dollars to the economy and fueled a black market for the currency. The nation allowed the pound to trade freely in November 2016 as part of an International Monetary Fund deal for a $12 billion loan to support its recovery and end the hard-currency crunch.

While the pound lost half its value after the float, a central-bank mechanism that guarantees investors’ ability to take money out of the country has limited the currency’s fluctuations, the IMF said in an email response to questions. That’s because when investors bring in hard currency, the central bank keeps the money in a special account, and then sells the cash back to foreigners on their way out.

Strong growth in inflows from tourism and remittances have also helped offset fund outflows in recent months, according to the Washington-based lender. The central bank is expected to hold it’s main interest rate at 16.75 percent on Thursday.

“The government will, in my opinion, stick with orthodox policies,” said Shahzad Hasan, an emerging-market debt manager at Allianz in London. “That means overall capital inflows should hold up well.”

Egypt’s current-account deficit for the July 2017 to March 2018 period narrowed 58 percent to $5.3 billion as remittances from Egyptian expatriates and tourism receipts rose by over 40 percent to about $27 billion.

The Mechanism

The central bank raised the cost of using the mechanism last year, pushing more investors to exit using the open market and boosting demand for dollars. But a solid supply of hard currency in the inter-bank market helped keep the pound stable over the past few months as investors sought to exit, according to three people familiar with the matter, who asked not to be named because they aren’t allowed to speak publicly.

“The repatriation mechanism still shields the pound from sharp fluctuations, even though raising its cost is the reason why the pound has started witnessing more volatility,” said Mohamed Abu Basha, director of macro analysis at investment bank EFG-Hermes in Cairo.

The currency’s 10-day volatility in May spiked to the highest since July 2017 as the pound depreciated 1.3 percent, the most on a monthly basis in more than a year. It has since eased, with monthly moves of 0.3 percent or less.

Price Shock Eases

The devaluation of the pound initially delivered a price shock to a country that relies heavily on imports. After staying above 30 percent for much of last year, annual core inflation -- the gauge that strips out volatile items -- was 8.54 percent in July, the lowest level since March 2016.

Fitch Ratings, which has a positive outlook on the African nation’s debt rating, is forecasting a smaller current-account deficit through 2020. Foreign-currency reserves have rebounded to more than $44 billion, from as low as $13.4 billion in March 2013. Significant gas field discoveries have also been made, such as the giant Zohr field that started production in December 2017.

“Egypt is a little bit over-crowded,” said Sergey Dergachev, who helps oversee about $14 billion in assets at Union Investment Privatfonds in Frankfurt. “But due to the relatively high yield and relatively stable currency, it will remain an interesting investment opportunity for emerging-market investors.”

To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net;Ahmed Feteha in Cairo at afeteha@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Srinivasan Sivabalan

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