CAIRO – Foreign investors have poured billions of dollars into Egyptian treasury bills in the month since it announced an $8 billion financial support agreement with the International Monetary Fund on March 6, bankers said.
The announcement followed a record $35 billion investment deal with the United Arab Emirates and coincided with a sharp devaluation of the currency and a 600-basis-point increase in the central bank’s overnight interest rates, breathing new life into Egypt’s flagging finances.
Foreign investors began fleeing Egyptian treasuries in late 2021 out of concern the currency was overvalued and the government stretching its ability to repay. The outbreak of the Ukranian war led to a full-scale flight.
Portfolio investment, which had been an important source of dollars to Egypt but one that was vulnerable to shocks, plunged by $20.98 billion in the year to end-June 2022 and lost another $3.77 billion the following year, according to central bank balance of payments data.
The IMF agreement and other financial support has since turned sentiment around, bankers and analysts said.
“Egyptian local bonds were and are continuing trade at very high yields, with the IMF and other bilateral support providing confidence there will not be a sovereign default,” said James Swanston of Capital Economics.
One senior banker last week estimated that foreigners had bought $5 billion in treasuries from the primary market and another $9.5 billion from the secondary market. A second put foreign purchases on both markets at $11 billion to $12 billion as of Monday.
Portfolio investments of all maturities climbed by just $228.8 million in the final six months of 2023, according to central bank data released on Monday.
As of Nov. 31, the most recent central bank data available, foreigners held 389.7 billion Egyptian pounds worth of treasury bills with maturities of one year or less. This was equivalent to about $12.6 billion at the official exchange rate at the time.
The rush of foreign investors is helping to push down the government’s dangerously high cost of financing its budget deficit and can help bridge the gap until more of the pledged support arrives in the next two to three months.
Egypt told the IMF last year it would work to develop variable rate, longer maturity debt instruments.
After the March 6 IMF agreement, the average yield on one-year treasuries jumped to 32.30%, in response to the 600 bps increase in interest rates, from 29.91%. But since then, the increased international demand has pushed it down to 25.75%.
The rush of foreign money was overwhelming, said a dealer at an Egyptian bank. “It ruined the market for local players.”
Interest payments accounted for nearly 55% of total government expenditure in the eight months to end-February, up from only 41% a year earlier, according to finance ministry data.
“Policymakers will want to be careful to not become overly reliant on so-called ‘hot money’ flows that leave Egypt susceptible to a sudden stop and capital outflows,” Swanston said.
