Finance Ministry reports are pointing to increasing demand for Egypt’s debt instruments – treasury bills and bonds – among foreign investors despite lower yields.
Central Bank of Egypt (CBE) Governor Tarek Amer announced at the Annual Arab Banking Conference on 8 December that Egypt had received dollar inflows totalling $20 billion over the past four years thanks to the country’s successful economic reform programme.
Foreign investments in debt instruments had recorded $22 billion at the end of December, said Mohamed Maait, the finance minister, at a press conference on 20 January. In September he told Reuters that foreign investment in Egyptian debt instruments had reached $20 billion since the floatation of the pound at the end of 2016.
According to Radwa Al-Sweify, head of research at Pharos, an investment bank, Egypt’s debt instruments are in demand because they offer higher returns than those in other emerging markets, especially considering their lower risk.
For example, Argentina offers a higher return than Egypt on its debt instruments, but the risks are higher as well, she said, confirming that Argentina’s return-to-risk ratio on the instruments was also higher than that of Turkey.
On 17 November, the returns on Egypt’s treasury bills decreased by half a percentage point after the CBE lowered its interest rates. Interest rates on treasury bills maturing in 91 and 266 days decreased at a rate close to half a percentage point in the first auction following the CBE’s fourth interest rate cut in 2019.
According to a CBE report issued on Sunday, foreign investments in Egyptian treasury bills recorded an increase of $384 million in December 2019, to reach $15.85 billion, up from $15.46 billion a month earlier.
The Ministry of Finance website recently revealed that on 26 January the returns on treasury bills maturing in 91 days had recorded 13.98 per cent and 14.33 per cent on those maturing in 182 days. Returns on 266-day maturity bills reached 14.362 per cent.
In contrast, returns on treasury bills with 91-day maturity recorded 19.6 per cent at the beginning of July 2019. Those on treasury bills with a maturity of 182 days registered 19.75 per cent. Returns on bills with a maturity of 273 days were 19.67 per cent.
Wael Ziada, founder of Zilla Capital for Investment, said returns on Egypt’s treasury bills and bonds were the highest compared to the emerging markets. He attributed the increasing demand to the country’s classification as one of the best-performing emerging markets and the improved performance of the economy.
The US financial news service Bloomberg said last May that the Egyptian pound was one of the best-performing currencies of 2019, noting that investors headed to Egypt because it “could be the best story of economic reform in the emerging markets,” as investment bank Renaissance Capital has called it.
The Bloomberg report expected Egypt would continue to be seen as a country attracting investments in debt instruments. It noted that investors borrow in currencies at lower interest rates and invest in countries that offer higher interest rates.
An earlier report by Bloomberg published at the beginning of 2019 stated that the Egyptian pound ranked second as the best-performing local currency after the Russian ruble.
Egypt was also ranked as the second-most resilient economy to shocks and third globally after China and India on the UK magazine the Economist’s list of countries showing strong economic growth at a rate of 5.6 per cent.
It was also placed second globally after China in GDP in the last quarter of fiscal year 2018-19 by the Economist.
According to a report by the United Nations Conference on Trade and Development (UNCTAD), Egypt drew in foreign direct investments worth $3.6 billion during the first half of 2019, making it Africa’s most attractive country for foreign direct investments at the time.
Ziada said that the Egyptian currency was one of the world’s best performing compared to the dollar. Foreign investors receive high returns compared to risks in competing markets, he added, explaining that a local currency that is improving and provides high returns, in addition to a stable economy, are all factors that lead to a continued demand for treasury bills and bonds and allow foreigners to avoid losses when converting the currency.
In March 2019, Fitch Ratings, an international ratings agency, raised Egypt’s rating to B+, up from B, with a “stable outlook”, but the agency noted that the continued healthy performance of foreign financing would depend on the flexibility of the local currency.
Fitch pointed out that the Egyptian pound has not witnessed strong reverberations since its depreciation in 2016.
The CBE floated the Egyptian pound in November 2016, resulting in the local currency losing more than half its value against the dollar. The pound began regaining its strength at the beginning of 2019, appreciating since then by around LE2 against the dollar.
In January 2019, the dollar was valued at LE17.88, but it stood at LE15.85 three days ago.
*A version of this article appears in print in the 30 January, 2020 edition of Al-Ahram Weekly.
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