Egypt Is a Jewel in the Crown for Emerging-Market Bond Investors

CAIRO (Capital Markets in AfricaA) – Egyptian bonds have plenty of appeal as economic reforms, support from the International Monetary Fund, and a surprise interest-rate cut offer something for investors at home and abroad.

Local-currency notes have returned 5 percent in February, the best gain in emerging markets, according to data compiled by Bloomberg. They’ve also posted the best year-to-date and one-year performance, while the currency has recovered to its strongest level against the dollar in almost two years.

Investor inflows have been underpinned by the IMF approving the fifth tranche of a $12 billion loan and praising the government’s policies. The economy has benefited from a decision to remove currency controls in 2016 that boosted the competitiveness of the country’s exporters as the pound tumbled. Emirates NBD predicts the economy will expand 5.3 percent in the fiscal year ending June.

“We have a high level of confidence Egypt will continue its reforms even beyond the IMF program,” said Gregory Smith, a fixed-income strategist at Renaissance Capital Ltd. “The country’s trajectory — robust growth, structural reforms, good policy implementation and falling debt levels — makes it stand out in emerging markets.”

‘Strategic Play’
The pace of consumer-price growth has fallen close to 13 percent after spiking to more than 30 percent in 2017. Egypt’s fiscal adjustment will help keep it on a leash until mid-2020 and then enable it to be brought down to single digits soon after, Smith said.

“Egypt is a strategic play based on the reform story,” he said.

While the nation’s dollar bonds are also rising, the greater returns from the pound-denominated debt, even after the central bank’s unexpected 100 basis point rate reduction, underscore investors’ willingness to assume currency risk. Foreign holdings of local debt climbed by $900 million in January as emerging markets clawed back some of their losses in 2018.

Egypt raised $4 billion last week in the dollar debt market and 1.5 billion pounds ($85 million) of debt this week, when investors offered to buy more than double the amount sold.

Still, volatility may be returning to the market.

In the past few weeks, investors have been looking to lock in profits before changes to taxes on local treasury bills and bonds. Another policy supporting the market was removed when the central bank lifted it’s repatriation mechanism for foreign investors, which guaranteed they could withdraw their profits in hard currency.

Source: Bloomberg Business News