Bankers said that foreign investors have pumped billions of dollars into Egyptian treasury bills since Cairo announced an eight billion dollar financial support agreement with the International Monetary Fund on March 6.
The announcement of the agreement came in the wake of a major investment deal worth $35 billion with the UAE. It also coincided with a sharp decline in the value of the pound and a decision by the Central Bank to raise overnight deposit and lending rates by 600 basis points, which enabled faltering public finances to catch their breath.
Foreign investors refrained from buying Egyptian treasury bills and bonds in late 2021 due to concerns about the overvaluation of the currency and fear of the government’s inability to pay.
Portfolio investments, which were an important source of dollars for Egypt but are vulnerable to shocks, fell by $20.98 billion in the year to the end of June 2022 and fell by another $3.77 billion in the following year, according to balance of payments data from the central bank.
Bankers and analysts said the agreement with the International Monetary Fund and other financial support had since caused a shift in sentiment.
James Swanston, of Capital Economics, said: Egyptian local bonds were trading at very high yields, and with the International Monetary Fund and other bilateral support agreements still providing confidence in the absence of default on sovereign debt.
- Investment flow
Estimates from a senior banker last week indicated that foreign investors bought treasury bills and bonds worth five billion dollars through the primary market and another $9.5 billion from the secondary market through investors. A second report estimated the total foreign investments in the two markets at between 11 and 12 billion dollars as of Monday.
Portfolio investments of all maturities rose by only $228.8 million in the last six months of 2023, according to central bank data released on Monday.
As of November 31, the latest central bank data available, foreign investors had bought 389.7 billion pounds worth of treasury bills with maturities of one year or less, which equates to about $12.6 billion at the official exchange rate at the time.
The turnout of foreign investors helps reduce the government’s dangerously high cost of financing the budget deficit, and could help bridge the gap until more pledged support arrives in the next two to three months.
Egypt informed the IMF last year that it would work to develop debt instruments with variable interest rates and longer terms.
After the agreement with the Fund on March 6, the average return on one-year Treasury bills jumped to 32.30 percent from 29.91 percent after increasing interest rates by 600 basis points. But increased international demand since then has reduced it to 25.75 percent.
An Egyptian bank trader said that the influx of foreign funds was so massive that it ruined the market for local players.
According to Finance Ministry data, interest payments accounted for nearly 55 percent of total government spending in the eight months to the end of February, up from just 41 percent a year ago.
Swanston said: Policymakers must be careful not to rely excessively on so-called “hot money” flows that make Egypt vulnerable to sudden cessation of capital flows or their exit. (Reuters)