Growing alarm in the market that Egypt could soon cave in to pressure with one of its steepest currency depreciations yet has sent investors seeking cover.
(Bloomberg) — Growing alarm in the market that Egypt could soon cave in to pressure with one of its steepest currency depreciations yet has sent investors seeking cover.
Derivatives used to hedge risks or for speculation signaled the approach of Egypt’s fourth devaluation since March 2022, belying calm in the spot market, where the pound traded little changed.
Non-deliverable forward contracts on the currency headed for their biggest drop since the last devaluation in January, with the 12-month tenor weakening almost 5% to 42.9 per US dollar on Thursday. The pound was at 30.9 in the spot market.
The moves reflect speculation by some market participants that authorities will allow for a steep decline in the pound at the end of — or after — the Muslim holy month of Ramadan that concludes around the second half of next week, according to Societe Generale SA’s Gergely Urmossy.
“There is consensus among market players — including myself — that the Egyptian pound will be devalued,” said Urmossy, an emerging-markets strategist in London. “The longer authorities wait with devaluation, the greater the magnitude could be.”
The anxiety and impatience are playing out in other vulnerable corners of the market, with Egypt’s debt slumping deeper into distressed territory.
The extra yield investors demand to buy Egyptian dollar bonds rather than Treasuries widened to 1,216 basis points on Wednesday, just 37 basis points shy of the record high reached in July, according to JPMorgan Chase & Co. data.
The government has about $74 billion in eurobond principal and interest payments coming due through 2061, according to data compiled by Bloomberg.
‘Frustrating Story’
“Egypt is becoming a frustrating story for many,” said Nafez Zouk, an EM sovereign debt analyst at Aviva Investors in London. “When you stack it all up, it’s frustrating to see how slow the progress has been.”
Concerns that the Arab world’s most populous nation will fail to honor its debt will remain front of mind for investors until there’s clarity that Egypt will devalue its currency and get the investment flows it needs to close its funding gap.
The pound has weakened about 50% over the past year, but remains far stronger than rates quoted in the black market. The divergence underscores the risk of further depreciation as the nation grapples with a foreign-exchange crunch.
The government pledged in October to move to a more flexible exchange rate, enabling it to clinch a $3 billion deal with the International Monetary Fund. Still, declines in the currency continued to be followed by long stretches of stability.
“We have been expecting a devaluation for some time now, and it is not materializing,” said Zeina Rizk, executive director of fixed income at Arqaam Capital in Dubai. “There is a loss of credibility at this point and I don’t think a devaluation is enough for inflows to return.”
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