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Egypt’s President Abdel-Fattah El-Sisi emerged largely unscathed from a bout of anti-government protests a month ago. Investors? Less so. Egyptian stocks are among the world’s worst performers since the demonstrations across several cities, which prompted the government to arrest nearly 2 000 people and restrict social media.
And local-currency bonds have underperformed emerging-market peers this month, slowing their world-beating advance over the course of 2019. The change underscores how quickly frontier markets such as Egypt, which became a favourite among global traders when it began a series of reforms backed by the International Monetary Fund three years ago, can turn for the worse.
“It has reminded investors just how narrow the exit window can be in adverse conditions,” said Paul Greer, a London-based money manager at Fidelity International, which owns Egyptian Treasury bills but has reduced its exposure in recent weeks.
Egypt retains a strong appeal. It’s still the fastest-growing Arab economy and its inflation rate has dropped to 4,8 percent from almost 18 percent a year ago.
That has helped boost its inflation-adjusted yields to around 10 percent — especially enticing at a time when major central banks are easing monetary policy and $13 trillion of bonds have negative rates.
Thanks to those yields and a strengthening pound, Egypt’s local bonds have gained 39 percent in dollar terms in 2019. That is more than seven times the average return across emerging markets, according to Bloomberg Barclays indexes.
But whereas investors previously focused mainly on Egypt’s impressive macroeconomic numbers, they now have to add to the mix politics and widespread discontent that rapid growth is failing to reduce poverty. Street protests have triggered the downfall of two Egyptian presidents this decade — Hosni Mubarak in 2011 and his successor, Mohamed Mursi, two years later.
The big pool of foreign investors holding the nation’s securities also leaves the market more vulnerable if there’s a sudden rush for the exit. External ownership of local debt stood at about $19,5 billion late last month, according to Finance Minister Mohamed Maait, up from $13 billion in January. Citigroup Inc. estimates there have been around $800 million of outflows since the demonstrations.
Cairo’s benchmark equity index remains 3,5 percent lower than it was before the protests.
Investor favourite
Emerging-market traders returned to Egypt after it got a $12 billion loan from the IMF in 2016 to ease a crippling shortage of dollars. It devalued its currency and reduced some of its extensive subsidy programs.
This year, the finance ministry’s held talks with JP Morgan Chase & Co. to try and get Egypt included in the Wall Street bank’s indexes for developing-nation local-currency bonds.
That would help attract even more portfolio investment. Egypt also hopes to conclude a deal by January with Euroclear, which settles transactions in the securities of dozens of countries.
With inflation slowing, the central bank will likely continue an easing cycle that has included 450 basis points of rate cuts this year. The Monetary Policy Committee will probably reduce its key rate by another 100 basis points to 12,25 percent at its next meeting on November 14, according to Mohamed Abu Basha, head of research at Cairo-based investment bank EFG Hermes.
That would still mean a “comfortable cushion for investors,” he said.
Nothing significant
Officials have played down the prospect of that. Last month’s unrest was “nothing significant” and will not change the direction of monetary policy, central bank Governor Tarek Amer said in an interview in Washington.
The “risk-reward has become more balanced,” said Esther Law, a London-based senior investment manager at Amundi Asset Management.
“We will need to monitor inflation closely in case of some risk of a weaker currency from portfolio outflows.” — Bloomberg.
Bongani Ndlovu