By Ahmed Feteha and Mirette Magdy
Foreign investors may be finally curbing their enthusiasm for Egyptian local-currency debt.
After almost a year and $18 billion of purchases, some investors have allocated all they can to Egypt. The inflows from foreign funds are still growing, but the pace has slowed to an average of 2 percent a week since mid-August, down from 8 percent, as policy makers signaled they may lower record interest rates once inflation eases.
The surge in portfolio investments has been seen as a sign of confidence returning after Egypt floated the pound last year to ease a crippling dollar squeeze and secure a $12 billion International Monetary Fund loan. Foreign investors now own more than 30 percent of outstanding Treasury bills, a record, attracted by some of the world’s highest yields and a currency that has halved in value against the dollar.
But attention is increasingly turning to the risks of over-exposure and of a sudden selloff in Egyptian assets, according to Bank of America Merrill Lynch economist Jean-Michel Saliba. Interest rates are too high for the economy to grow and the government to borrow, he said, so it needs to find other sources of foreign exchange to meet its funding gap.
“Positions are extended and most investors have already maxed out their limits on Egypt,” Saliba said. “So it has to come from foreign direct investment, and that may be slower.” Business reforms, privatization and repayment of arrears to foreign oil companies will be key, he said.
Egypt received about $7.9 billion in foreign direct investment in the fiscal year ended June 30, up from $6.9 billion a year earlier but below its $10 billion target. Egypt may exceed that goal in the current fiscal year, Investment Minister Sahar Nasr told Bloomberg.
The average yield on Egyptian Treasuries rose as high as 22 percent after the flotation, higher than similarly rated countries including Angola and Ghana. To bring rates down, the government consistently sold more debt than it offered, and the average rate has plummeted by about 400 basis points since July. In September, for the first time in more than a year, it briefly lost its place as the highest yielding among major emerging markets.
The strategy was not without risks. Moody’s Investors Service cited “very weak government finances” when it left Egypt’s rating at junk in August.
“We may not get the same inflows going forward, especially as inflation slows and yields fall,’’ said Deputy Finance Minister Mohamed Maait. “In any case, the coming stage is one where we get more permanent inflows like foreign direct investments — not just portfolio inflows in T-bills.”
With the IMF forecasting a drop in inflation to about 10 percent by mid-2018 and the market speculating about a rate cut, some investors are buying notes now to lock in higher returns, said Simon Williams, HSBC Holding Plc’s chief economist for central and eastern Europe, the Middle East and North Africa.
“Egypt hasn’t seen the peak of inflows yet,” though it is getting closer, Williams said.
Even so, Egypt’s allure isn’t based solely on high yields — its “macro story” is also convincing for investors, according to Elina Ribakova, head of EMEA research at Deutsche Bank in London.
Economists expect growth of 3.5 percent this year and 4.2 percent in 2018, according to a Bloomberg survey last month. The government is rolling out a privatization program and new investment laws, while the Mediterranean Zohr gas field is expected to start initial production in 2017 — easing pressure on the nation’s energy imports.
While inflows are now at “capacity,” the country’s improving fundamentals should attract more “sticky money,” Ribakova said.