The market is in disarray in navigating what’s become a once-a-decade crisis in the Arab world’s most populous country.
(Bloomberg) — The market is in disarray in navigating what’s become a once-a-decade crisis in the Arab world’s most populous country.
JPMorgan Chase & Co. is taking three to six months to assess Egypt’s eligibility for its bond index after last week’s decision to place the country on negative watch as a result of the hurdles reported by sellers of government securities in repatriating foreign currency. A month earlier, Moody’s Investors Service said it’s extending a review for downgrade of Egypt’s rating.
But few have been indecisive for as long as the International Monetary Fund, almost a year after extending a $3 billion rescue package. The first review of Egypt’s program, expected in March, has yet to take place — a critical delay for a government that’s all but locked out of capital markets abroad and now unable to access the next tranche of its IMF loan.
Left without a playbook during one of the biggest selloffs in emerging markets, Egypt’s bond investors are agitating over whether the cash-strapped nation will be getting the money it needs, wary of committing capital to a country whose government spends nearly half its revenue on paying interest. Egypt meanwhile faces an estimated cumulative funding gap of more than $11 billion over the next five years, according to Goldman Sachs Group Inc.
“The current valuations already reflect the highly uncertain and risky scenario that Egypt is facing,” said Carlos de Sousa, an emerging-markets money manager at Vontobel Asset Management AG in Zurich. “I don’t think the risk of default is imminent, but the status quo is clearly unsustainable.”
At stake for investors is how — or even whether — to time a return to a country whose elevated interest rates once made it a magnet for hot money. In the half a decade before the first of three rounds of devaluations starting in March 2022, Egypt offered one of the world’s most lucrative carry trades.
The investment case around the $470 billion economy hasn’t been the same since the commodity price shock from Russia’s invasion of Ukraine and currency depreciation combined to bring Egypt’s inflation to record highs.
Bloomberg Economics ranks Egypt as second only to Ukraine among countries most vulnerable to missing debt payments.
Egypt’s dollar debt has lost about 9% this year, the worst performer across emerging markets after Bolivia and Ecuador, according to Bloomberg indexes. And many of its bonds are in distressed territory, with the extra yield investors demand to buy Egyptian dollar bonds rather than Treasuries at 1,157 basis points.
Following the series of devaluations, the pound has been kept stable in the past six months, maintaining a discrepancy with the local black market where it’s available at a weaker level than at banks. Derivatives traders have pared bets for another steep decline in the currency within the next three months.
Looming December elections, in which President Abdel-Fattah El-Sisi is predicted to seek a third term, are a further complication, especially after the Egyptian leader warned people can’t bear additional price hikes stemming from devaluations.
The prospect of a fast breakthrough with the IMF is increasingly remote, with Vontobel not pinning its hopes on the fund’s meetings in Marrakech next month for a positive outcome, according to de Sousa. The IMF has been waiting for Egypt to make good on reforms including moving to a flexible exchange rate.
When asked for a comment, the IMF’s spokesperson said the fund continues its “close engagement” with Egypt and will announced updates “in due course.”
Dollar Backlog
Egypt’s slow progress in meeting the program’s goals is depriving the government of support at time when it’s already expensive for riskier, high-yield borrowers to raise money in global capital markets, with the US Federal Reserve set to keep interest rates higher for longer.
While Egypt has made some headway in asset sales — and the IMF believes authorities are now more serious about carrying out the ambitious privatization plan, people familiar with the matter told Bloomberg News — the country has yet to raise enough foreign currency to ease a crunch and clear a backlog of dollar requests from importers and other companies.
Read more: Egypt’s Election Race Adds to Drama Around IMF Deal, Devaluation
“Let’s see what happens in relation to the IMF meetings,” said Lars Jakob Krabbe, a Stockholm-based fixed-income portfolio manager at Coeli Frontier Markets AB, who’s “constructive” on Egypt’s debt.
Concerns that the nation will fail to honor its debt will remain front of mind for investors. The government has more than $45 billion in eurobond principal and interest payments coming due over the next decade, according to data compiled by Bloomberg.
Egypt is unlikely to default over the next 12 months, “barring another dramatic external shock,” said Gordon Bowers, a London-based analyst at Columbia Threadneedle Investments. The fund manager continues to hold overweight positions in Egypt’s debt in its “unconstrained” accounts.
Any progress with the IMF could lead to a reversal in Egypt’s fortunes and its debt’s outperformance in emerging markets, according to Bowers, who believes political constraints hindering the shift to a more flexible exchange rate can be overcome should Sisi win another mandate.
“The market seems to be getting more comfortable with the muddle-through story for Egypt in the fourth quarter,” he said. “That said, execution risks remain elevated.”
Egypt doubters, however, sniff out an opportunity as the waiting game drags on.
Societe Generale SA initiated a trade that amounts to a bet on the pound’s devaluation. Fidelity International is underweight Egyptian assets relative to the benchmarks it follows and deems any strength as a chance to sell.
“The potential for an early election is not a benign outcome for markets in our view,” said Paul Greer, a money manager at Fidelity in London. “It adds an element of political uncertainty and probably delays any new FX devaluation even further.”
–With assistance from Carolina Wilson.
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