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Egyptian bonds deserve heavy overweight allocation

Staff writer
July 22, 2021, 3:36 p.m.
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Egypt’s local debt assets look well placed to continue attracting yield-seeking investors, against a backdrop of accommodative global liquidity conditions, according to Regis Chatellier, Director EM Strategy at Oxford Economics.

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Egypt’s local debt assets look well placed to continue attracting yield-seeking investors, against a backdrop of accommodative global liquidity conditions, according to Regis Chatellier, Director EM Strategy at Oxford Economics.

“Egypt’s real yields are much higher than peers and the central bank is keen to maintain some buffer. Egyptian inflation is going up, lifted by food and petrol prices, but in contrast to many emerging markets (EMs), the latest readings do not flash red,” he said.

“With weak demand keeping a lid on core price growth, we see CPI inflation averaging 5.5% in 2021, before rising to 7.4% in 2022, well within the CBE’s 7% (+/-2%) target. As a result, we see no changes in interest rates this year, with the CBE rate staying at 8.75% – high by global

standards – ensuring the attractiveness of local currency assets,” he added.

Chatellier said that the average yield of 14.6% on the 10-year bond in June leaves the return in real terms at about 8.5%, based on Oxford Economics’ year-end inflation projection.

“High rates have underpinned a $4.4bn inflow into short-term debt instruments YTD, boosting foreign holdings of Egyptian T- 25 bills to $22.3bn at end-May, an all-time high,” he said.

The inclusion of Egypt’s debt in global bond indices could potentially see $6bn more flow in, he said.

“These portfolio inflows, alongside external debt issuance, have been key to fund the persistently wide external deficit, likely to hit 4.5% of GDP this year. Domestic demand for imports has remained relatively robust throughout the pandemic and the import bill will rise alongside domestic recovery. Travel receipts are making a slow recovery but are still around 50% lower than their pre-pandemic level, while remittances, FDI inflows, and Suez Canal receipts are trending higher.”

Chatellier added that healthy FX reserves are containing depreciation risks. The strong appetite for Egyptian hard currency debt has supported FX reserves, and is indicative of ongoing easy access to global capital markets – despite Egypt’s poor fiscal reputation, its high debt, and a tendency to overshoot stated consolidation targets, he said.

According to Chatellier, IMF funding under Egypt’s Stand-by Agreement approved in 2020 has also helped rebuild reserves.

“We maintain heavy overweight exposure to Egypt. Egyptian USD bonds have been trading wider than those with similar ratings. Their attractiveness is also flagged by our sovereign credit model, which combines the sovereign risk tool (SRT) with market factors such as oil prices, UST yields, and global market volatility.”

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