Egypt’s Soaring Rates Attract Inflows but Carry Risks, S&P Warns

(Bloomberg) -- Egypt must find a way to pay less on its debt if it’s to weather a potential increase in global interest rates, S&P Global Ratings warned in a report on Sunday.

Egypt has the highest differential between its key policy rates and inflation among more than 50 economies tracked by Bloomberg, making its bonds and bills a favorite among international investors hungry for yield. Foreign holdings in the North African nation’s notes stand at more than $28 billion, an important buffer as tourism awaits a full recovery from the coronavirus pandemic. 

But the world’s highest real interest rates also come with an elevated fiscal cost and leave Egypt vulnerable to significant outflows if rates in the developed world rise -- particularly if the U.S. Federal Reserve tapers its quantitative easing policies faster than expected, S&PGR credit analyst Zahabia Gupta wrote in the report.

Egypt Extends Interest Rate Pause After Local Price Hikes

“Egypt’s interest-to-revenues ratio and its interest payments as a percentage of GDP are among the highest of all rated sovereigns,” according to Gupta. “A potential path for Egypt to lower its interest bill is to increase investor confidence in its economic model such that investors cut the risk premium they require on Egypt’s government debt.”

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