Egypt now offers the third-highest yield on local currency bonds among 23 developing economies, which could make it an attractive destination for investors who previously avoided Egyptian domestic debt, according to a report from the agency.BloombergTitled “Hot Money Flows into Egypt.”
The yield on bonds in the local currency has now averaged close to 30%, and the pound, on Thursday, compensated for some of its significant losses with gains of up to 1.5% against the dollar.
Investors had previously avoided Egyptian domestic debt, as the central bank resisted devaluing the pound, which had become overvalued in the eyes of foreign traders, contributing to a hard currency shortage that caused high inflation.
Egypt devalued its currency by more than 38% after a record interest rate hike of 600 basis points on Wednesday.
The agency said that support for the expanded IMF loan worth $8 billion, and the UAE’s commitment of more than four times that amount, has flipped the scenario for some of the biggest names in finance such as Aviva Investors and Vanguard Asset Services.
“What Egypt has been needing for a while is a positive confidence shock, and Wednesday it was done with actual money,” Nafez Zouk, an emerging market sovereign debt analyst at Aviva Investors in London, said on Wednesday.
Egyptian domestic bonds lost more than 10% last year, a period in which domestic debt in emerging markets returned 6%, according to the Bloomberg index. The Russian invasion of Ukraine in February 2022 sent commodity prices soaring, driving up the prices of wheat and fuel imports to Egypt, and prompting bond investors to flee the country’s domestic debt.
In a game changer, Egypt is opening a path to higher returns by raising interest rates and removing currency restrictions. It received support from the International Monetary Fund days after concluding a $35 billion investment deal with the UAE.
The difficulties are likely to worsen in the near term for the economy, which is also under pressure from the war between Israel and Hamas, but the authorities are counting on reforms that attract foreign investors to the country to end the worst economic crisis in decades.
The investment situation in Egypt will become clearer next week as the market stabilizes, Egypt replenishes its reserves and stabilizes its financial resources, and it may be a matter of time before the government is able to benefit from global capital again.
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