Investors expect that Egypt will be forced to make a “painful” devaluation of the pound’s exchange rate after the end of the current presidential elections, according to Bloomberg.
The faltering Egyptian economy receives support worth tens of billions of dollars from the International Monetary Fund and the Gulf Cooperation Council countries, but the performance of its foreign bonds indicated distress during most of the past year.
Egypt will likely need a further devaluation of the pound to obtain more rescue funds.
The Director of the International Monetary Fund, Kristalina Georgieva, said last October that Egypt would “bleed” its precious reserves unless it devalued its currency again, as reported by Bloomberg, but she came back and said in November that the Fund was “seriously studying.” A possible increase in the loan program for Egypt due to the economic difficulties resulting from the Israeli war on the Gaza Strip, according to Reuters.
Support according to the “tragedy” of Gaza
Abdul Qader Hussein, head of the fixed income assets department at Arqaam Capital Limited in Dubai, says that the market expects support from the International Monetary Fund and the Gulf Cooperation Council countries, and perhaps even support from the United States of America and the European Union, after the presidential elections, based on the development of the “tragedy” in Gaza. As he says.
Egypt is the second largest borrower from the International Monetary Fund after defaulting Argentina.
Expectations are also increasing that Egypt will obtain more money from its allies in the Gulf Cooperation Council, and even the West, as the country becomes an essential gateway for aid to reach the Gaza Strip, against which Israel has been waging a devastating war since last October 7 following the launch of Operation “Al-Aqsa Flood.” By the Islamic Resistance Movement (Hamas).
But the most important prerequisite for obtaining more financing – according to Bloomberg – is the easing of controls imposed on the foreign exchange market, if not a complete liberalization of the Egyptian pound.
Traders in the financial derivatives market are betting that Egypt will be forced to allow the pound to decline by 40% over the next year, so that its exchange rate will decline to more than 50 pounds for every dollar, from $30.93 currently, after it has lost about half of its value since March 2022.
For his part, Charles Robertson, head of macro strategy at FIM Partners, expects a 20% devaluation of the Egyptian currency before obtaining greater financing from the International Monetary Fund, considering this a positive possibility for Egyptian bonds denominated in dollars, and perhaps stocks as well.
Bond performance
Regarding external bonds, the question remains as to whether Egypt is able to accomplish everything required to address the turmoil in its economic and financial markets.
It is noteworthy that the markets’ expectation – during the past week – that Egypt would seek to raise the value of the currency, led to a decrease in the return required by investors to hold Egyptian bonds denominated in dollars, instead of US Treasury bonds, to below the threshold of one thousand basis points (10%) that is being considered. It is widely considered an indicator of an economic crisis.
Adrian du Toit, director of emerging markets economic research at Alliance Bernstein, based in London, believes that the performance of Egyptian bonds denominated in foreign currencies has been good, based on expectations that once the risks related to the elections have passed, the Egyptian government will have more room to maneuver and the International Monetary Fund will respond somewhat. For Egypt’s financing needs.
Hot money addiction
Egypt’s addiction to hot money is a fundamental cause of its current crisis, as this money flows into stocks and bonds just as quickly as it can leave.
Egypt has long offered some of the highest real interest rates in the world in order to attract the foreign exchange needed to cover the deficit, leaving the country under a burdensome debt burden.
Egypt’s debt exceeds 90% of its gross domestic product, and the Egyptian government has a higher debt burden than most other emerging markets, including Argentina, Brazil, India, Pakistan, South Africa, Mexico, Nigeria, and Turkey.
Over the past decade, Egypt has been forced to allocate more than half of its tax income to pay interest on its debts, and in the period from July to September of this year, interest costs amounted to more than 1.5 times what was collected in taxes, according to data from Ministry of Finance.
This strategy was only sustainable as long as capital kept flowing, and with war between Russia and Ukraine in 2022, hot money not only stopped, but reversed out of the country as inflation rose on more expensive imports of key commodities, from wheat to oil, and declined. Net portfolio investment flows to $3.8 billion in fiscal year 2022/2023, from $21 billion in the period thereafter.
Egypt has since been trying to get its economy back on track and attract investors back to the country, but Fitch Ratings and Moody’s Investors Services have downgraded the country’s credit rating in recent months, due to the ongoing shortage of foreign currencies and expensive debt.
These risks, combined with the rise in global interest rates, deprived Egypt of the dollars it needed to pay for imported basic goods, and forced it to devalue the currency.
The significant widening between the dollar exchange rate in the official and parallel markets indicates increasing pressures, underscoring the need for additional devaluations, Deutsche Bank strategists, including Christian Vitoska, wrote in a note dated December 6.
They expect a new round of currency devaluation to take place after the presidential elections and before the IMF reviews are completed in early 2024.
Egypt’s balance of payments recorded a surplus of $882.4 million during the fiscal year 2022/23, after a deficit of $10.5 billion in the previous fiscal year, due to restrictions imposed by the government on imports from abroad due to the scarcity of the dollar, according to a statement by the Central Bank of Egypt.
