Currency bond traders flow into Egypt after bailout deals

• Banks U-turn on Egypt debt
• Carry trade attracts investors
• IMF and ADQ add confidence

JPMorgan Chase & Co has issued a circular urging its clients to buy up Egyptian sovereign debt, less than two months after it removed Egypt from local-currency bond indexes.

“The Egypt carry trade is back in focus, and this time should be different,” the New York bank’s Gbolahan Taiwao wrote in a note on March 7, saying “the catalysts we have been waiting for have now materialised”. 

That same day, Goldman Sachs said recent events had revived interest.

A carry trade is a strategy that involves borrowing in a low-interest rate currency and converting the borrowed amount into another currency that provides a higher return.

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The apparent U-turn by global banks on Egyptian debt came as Cairo allowed the Egyptian pound to depreciate 37 percent against the dollar – after holding it in place for more than a year despite a growing parallel market – and raised interest rates by a record 600 basis points to 27.25 percent. 

Along with the UAE’s much-publicised Ras el Hekma deal – whereby the Emirati sovereign investment company ADQ agreed to invest $35 billion in Egypt over the next two months – and agreement on an $8 billion International Monetary Fund loan, these developments were followed by a surge of interest in Egyptian treasury bills. 

The Thursday following the currency float, Egypt sold EGP88 billion ($2 billion) of one-year debt, in an offering that was eight times oversubscribed, as well as EGP14 billion of six-month bills. 

• Egypt’s $8bn rescue package brings new challenges
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• Egypt’s inflation rate makes record jump in February

According to Bloomberg, Egypt now offers the third-highest yield on local-currency bonds among a select group of 23 developing economies, with average returns close to 30 percent.

Karim Henide, a London-based portfolio manager, said that Egypt is rumoured to be “the trade of the year”. 

“With respect to the carry trade, it’s gone from the anti-consensus trade to almost looking overcrowded.”

The one-year treasury bills issued last week stand to garner EGP230 billion in interest compared to the EGP30 billion offered by bonds last year, a five-fold increase when adjusted for the devaluation. 

It is a sharp turnaround from two years ago when $20 billion exited the Egyptian carry trade following the outbreak of war in Ukraine, exacerbating a foreign currency shortage and exposing the country’s reliance on hot money in-flows. 

Hot money is capital which is frequently transferred between financial institutions in an attempt to maximize interest or capital gain.

Speaking to the American Chamber of Commerce in Egypt a few months later, finance minister Mohamed Maait said that “the lesson we have learned [is that] you cannot depend on this type of investment”.

“It is coming just to get high yields, and once there is a shock it leaves the country,” he said.

As hot money rushes into Egypt once again, analysts say that there is a risk that this dependence could manifest anew.

“That is certainly something Egypt has been susceptible to before,” says James Swanston, Mena economist at Capital Economics, but he believes Egypt needs “the hot money to come in because it has fled”.

Hopes for stability

Egypt may be better positioned to resist a dependance on hot money than it was three years ago.

Swanston also believes that big deals, such as the UAE’s Ras el Hekma agreement, could “trigger a bit more direct investment into Egypt’s economy that’s a bit more stable and less flighty” than investment through the carry trade.

Since the devaluation, money has started to pour in from international lenders. Deals have been reported with the World Bank, the European Union, the African Development Bank, the Arab Monetary Fund, China and Germany.

In the short to medium term, Egypt’s FX needs may have been put to bed by developments over the last three weeks. Initial investment from the Ras el Hekma deal alone should be enough to cover its external financing for the next three to four years, based on estimates from Goldman Sachs.

Following the UAE deal, Moody’s upgraded its outlook on Egypt from negative to positive, citing the deal as a major reason for the change. 

Interest in long-term Egyptian debt has been less forthcoming, however. On Monday, CBE refused to accept any bids after listing EGP2.5 billion worth of three-year bonds and EGP250 million of five-year bonds in its first bond sale of the year.

The Finance Ministry, on whose behalf the CBE was acting, was reportedly unprepared to accept the 28 percent to 31 percent interest range the banks were bidding.

Analysts AGBI spoke to were in agreement that the pound is currently trading at its fair value.

“It doesn’t feel as much of a false dawn as we’ve seen before,” Capital Economics’ Swanston says.