Over the past two weeks, the CBE has gone through several offerings of T-bills meant to finance the country’s budget deficit. Of these, the last offering had a value of EGP 38 billion, but the accepted bids amounted to only EGP 4.97 billion. Before this, an offering with a value of EGP 3 billion brought in EGP 1.09 million. In late March, another offering valued at EGP 3 billion brought in EGP 5.05 million.
This poor showing reflects market uncertainty, with investors anticipating another devaluation in the Egyptian pound.
Egyptian debt instruments have been declining in value ever since the Russian invasion of Ukraine last year helped kick off an economic crisis in the country and led to plunging foreign currency inflows.
The situation worsened for all emerging markets when the US Federal Reserve raised interest rates in a bid to tackle inflation.
The CBE adopted a similar policy to rein in inflation that has reached a historic high in Egypt; annual core inflation rose from 31.2 percent in January to 40.3 percent in February.
What has caused the loss of interest in Egyptian bonds?
Banking expert Khaled El-Shafei explained that investors have lost appetite for Egyptian bonds due to the devaluation of the pound, which erodes trust in the local currency and compromises Egypt's ability to attract more investments in its debt instruments.
The pound has lost around 100 percent of its value since March 2022, and now trades at nearly EGP 31 to the dollar.
In the recent T-bill offerings, investors demanded a 28 percent interest rate amid fears of another devaluation, but the government accepted only around $1 million at a 21 percent interest, El-Shafei added.
The last T-bill auction that had good coverage was in early March, in which the Ministry of Finance requested EGP 3 billion and received huge bids, but accepted only EGP 1.5 billion at an average yield that went slightly over 21 percent, according to Mohamed El-Beih, another a banking expert.
After the last interest rate hikes by the CBE, the finance ministry became more selective with regard to bids for its bond offerings, as banks were requesting high yields, he explained.
On 30 March, the CBE's Monetary Policy Committee (MPC) raised key interest rates for the first time in 2023 by two percent (200 bps) in an attempt to control soaring inflation.
In April, El-Beih continued, the ministry launched two offerings each amounting to EGP 3 billion, and received many bids at higher yields, and accepted only small bids with lower yields.
Banks are incurring high costs due to the recurring increases in interest rates, which jumped from eight percent early in 2022 to between 18.25 and 19.25 percent recently, the expert said.
He pointed out that banks are paying higher returns which drives them to seek investments with even higher yields, including bonds.
Similarly, due to the pound's devaluation, any international financing institution would seek big yields to invest in EGP-dominated debt instruments, El-Beih added.
He highlighted that the futures contracts for the pound surpassed the official value of the currency by a large margin which compromises the Egyptian economy's ability to attract foreign investment.
Egypt’s current options
In October 2022, Prime Minister Mostafa Madbouly announced that a total of $25 billion of indirect investments in the local debt instruments (hot money) had exited the Egyptian market toward a higher return on the US dollar after the Fed raised interest rates.
The country is currently in need of securing huge dollar inflows to fulfill a variety of obligations, including importing strategic commodities and paying debt service.
El-Shafei noted that the Egyptian government has various options to cover its financing needs, which amount to $14 billion, including creating a better environment for direct investments. He said the government could also promote investment opportunities abroad. The expert stated that there are some issues impeding the attraction of foreign investments, including bureaucracy, which is worrisome to many investors.
El-Shafei concluded that direct and indirect investments in concrete projects that help narrow the gap in the local demand for goods, and create a surplus for export, is the best option to stabilise the Egyptian economy.
In a similar vein, El-Beih mentioned that the government could take some measures to boost dollar inflows and sustain a balanced exchange rate for the pound, including the government IPO program, which aims to offer 32 companies with high financial performance on the Egyptian Exchange, to attract investments.
The successful implementation of that plan will result in stability in the currency and – consequently – reduce yields requested for investment in Egyptian debt instruments to reasonable levels, El-Beih explained.
Another source of foreign currency is tourism, which has been always secured massive inflows for Egypt, El-Beih said. The government should focus on the tourism sector to solve its issues and design programs to increase the number of tourists visiting Egypt, he added.
The expert stated that there are industries that do not require a huge effort to develop, in order to boost exports and secure foreign currency.
Offering international bonds, such as Euro or panda bonds, is another option for securing foreign currency, El-Beih said, adding that the finance ministry is considering offering $5 billion Sharia-compliant sukuk in the coming period.
El-Beih expected that the current situation would change by the end of the year, as the CBE's tight monetary policy reaches its peak with an additional increase of 1-2 percent.
The decline in interest rates will stabilise the economy and help attract investments in the Egyptian bond market, the banker highlighted.
The stability of the pound's exchange rate against all currencies, not just the dollar, and the improvement of all macroeconomic indicators, will boost investments in Egyptian debt instruments, El-Shafei maintained.