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Sliding Currency May Turn to Egypt’s Advantage

Sliding Currency May Turn to Egypt’s Advantage

(Bloomberg) --

A stable currency and elevated interest rates have kept Egypt’s bond market humming for months. It may now take a more flexible pound to help keep investors coming back for more.

Once a favorite of emerging-market funds, Egypt’s local bonds are this month’s worst performers among developing nations after Argentina, Colombia and Chile. The pound, steady for much of this year, started weakening around mid-May and then suffered its longest losing streak since the nation floated the currency as part of a sweeping program to revive the economy in 2016.

Sliding Currency May Turn to Egypt’s Advantage

The currency adjustment follows a policy response to the coronavirus pandemic that began by pumping stimulus into the economy and included Egypt’s largest-ever interest-rate cut in mid-March. With the country’s key sources of foreign-exchange revenue under strain from disruptions in trade and tourism, authorities have since then largely focused on offsetting a funding gap estimated at $10 billion this year.

As capital outflows picked up and the central bank’s net international reserves started to decline, Egypt secured $2.8 billion in emergency aid from the International Monetary Fund and $5 billion from international bond markets. It also reached a preliminary deal with the IMF for an additional $5.2 billion under a one-year stand-by arrangement.

“We would not be surprised to see some more moderate, mild and heavily controlled weakness in the Egyptian pound over the coming weeks and months given the current-account deficit and more flexibility from the authorities following their recent negotiations with the IMF,” said Paul Greer, a London-based money manager at Fidelity International, which oversees about $380 billion.

Coming off a record appreciation in 2019, the Egyptian pound defied a drop in developing-nation currencies in the first three months of the year, strengthening more than 2% for its fifth quarterly advance. It’s down around 2.6% against the dollar this quarter, with the bulk of the losses accumulated this month after weakening past 16 per dollar at the start of June.

What analysts see ahead for the pound:

  • Emirates NBD PJSC expects the pound to reach 17 against the dollar by year-end and 18 by end-2021. The pressure on the currency won’t be as intense as it was in 2016 given Egypt’s economic progress and the prospect of a recovery in inflows in the next 12 months
  • EFG Hermes sees Egypt’s currency at 16.5-17 by year-end, following “a clear signal from the central bank that its support to the pound amidst the unprecedented capital outflows in the past two months is being withdrawn, with the currency gradually reflecting market forces”
  • HSBC Holdings Plc expects the pound at 17.5 by year-end, weaker than its previous forecast of 17, “with the risks weighted toward a steeper pace of decline” in the second half
  • “The external support should prevent disorderly FX movement, but it would not be surprising to see the pound give up the gains made in 2019 given the weaker external balance,” JPMorgan Chase & Co.’s Giyas Gokkent wrote in a report

A selloff that began across emerging markets in March quickly spread to Egypt. Foreign holdings of Treasury bills and bonds were down to between $9 billion and $10 billion at the end of May, according to Cairo-based investment bank EFG Hermes, from nearly $25 billion in January. The country has seen capital outflows of about $17 billion in March and April.

“Markets that investors view as substitutes to Egypt have more flexible currencies,” said Richard Segal, a senior analyst at Manulife Investment Management in London.

But sentiment in the bond market may now be turning. Cairo-based Naeem Holdings pointed to a “sizable jump” in the subscription ratio -- a gauge of demand -- at recent Treasury auctions amid signs that foreign portfolio investors are building up positions in Egyptian T-bills for the first time during the outbreak.

Despite the nation’s funding gap, the combination of IMF support and the government’s $5 billion bond sale in May has “significantly eased short-term liquidity pressure,” said Shamaila Khan, director of emerging-market debt at AllianceBernstein in New York.

More relief may be on the way. A deceleration in price growth to a six-month low could allow the central bank to resume monetary easing soon. Even after a 300-basis-point cut at a March emergency meeting, Egypt’s inflation-adjusted rates are at 4.55%, still well above many developing nations.

“We feel the local-currency bonds offer good value given the attractive real yield risk premium, the steepness of the curve and the potential for further monetary easing from the central bank later in the year,” Fidelity International’s Greer said.

©2020 Bloomberg L.P.