Egypt Says Lower Yield Unlikely to Dim Demand for Carry Trade
Egypt Plans to More Than Double Average Debt Maturity This Year
(Bloomberg) -- Egypt’s Finance Minister Mohamed Maait said the country’s local-currency debt will remain attractive even as the central bank joins a global easing cycle.
Policy makers reduced interest rates by 250 basis points in the past two months. And Maait, while stressing the central bank’s independence, said a return of 3%, plus or minus 1 percentage point, would be “a reasonable real interest rate that keeps Egypt attractive.”
The current rate of about 5.7% is among the highest in the world.
“We always respect that monetary policy is made at the central bank and fiscal policy is made here,” Maait said in an interview at his ministry in Cairo.
Egypt will raise its share of longer-dated debt to 40% of annual domestic issuance by the end of the current fiscal year, from 5% in 2017-18, he said.
A reform push has revived investor interest in the most populous Arab nation after it removed currency controls in 2016, floating the pound to ease a crippling dollar shortage and seal a $12 billion International Monetary Fund loan. After surviving about $10 billion in outflows last year during a selloff in emerging markets, the central bank was confident enough to lift its repatriation mechanism, which guaranteed foreign investors could withdraw their profits in hard currency.
Foreign holdings of local debt have surged to about $19.5 billion, according to Maait, up from just over $13 billion in January.
A shift to issuing more longer-term securities and a reduction in nominal yields won’t necessarily ruin the appeal of Egyptian debt. Until now, it’s been attracting foreign investors with one of the highest real rates.
Along with strengthening currency, that’s made Egypt the world’s best carry trade this year, especially as investors look to escape $14 trillion of negative-yielding debt globally.
Egypt’s pound bonds have earned holders a total return of 37% in dollars, which is almost 10 times the average for local-currency debt in emerging markets, according to Bloomberg Barclays Indexes.
A real rate of 3% to 4% is still likely to keep the country’s debt attractive, according to Richard Segal, a London-based senior emerging-markets analyst at Manulife Asset Management.
“It depends on what the inflation rate is because ultimately foreign investors care about the risk-adjusted rate in dollar terms,” Segal said. “If interest rates were cut sharply and this caused the currency to depreciate, that would be another story.”
For now at least, the pound has kept up its rally. It’s up 10% this year against the dollar, making it the world’s best-performing currency after the Ukrainian hryvnia.
With a gradual shift away from short-term T-bills and toward instruments such as Treasury bonds, the goal is to push the average maturity on debt to around four years by June 2020, up from 1.9 years in 2017-2018, Maait said.
The Finance Ministry has embarked on a four-year strategy that aims to reduce the debt burden in one of the Middle East’s most indebted countries to 80% of gross domestic product by 2022.
The approach involves diversifying debt instruments, currencies and investor bases, and could see the introduction of new instruments such as variable-rate bonds linked to inflation and zero-coupon securities. Egypt’s current fiscal year ends June 30.
“You need some sort of diversification, this is the main concept we are adopting,” Maait said. A first international issuance this fiscal year is likely to be in dollars, and sukuk, green bonds, so-called Panda bonds in Chinese renminbi and Samurai sales in Japanese yen are also being considered, he said.
Investor interest in Egyptian local debt could be boosted by a future agreement with Belgium-based Euroclear, which settles transactions in securities in dozens of countries, and by meeting the technical specifications to include Egyptian debt in JPMorgan’s emerging-market local-currency bond indexes, Maait said.
He said he hopes to conclude a Euroclear deal by January and meet requirements for JPMorgan by July. A previous target of joining Euroclear this month was rescheduled because of legislative issues that parliament should address soon, he said.
(An earlier version of this story removed an incorrect name of an index.)
--With assistance from Netty Ismail.
To contact the reporters on this story: Benjamin Harvey in Istanbul at bharvey11@bloomberg.net;Mirette Magdy in Cairo at mmagdy1@bloomberg.net;Paul Wallace in Lagos at pwallace25@bloomberg.net
To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Paul Abelsky, Michael Gunn
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