Egypt's lucrative carry trade in the balance after recent dips
CAIRO: Analysts and bankers expect foreign investors to largely roll over their holdings of Egyptian treasuries one year after an IMF deal and record UAE investment rescued a faltering economy.
Local currency T-bills worth 1.08 trillion Egyptian pounds ($21.3 billion) are due to mature in March. Most are one-year bills bought soon after Egypt signed an $8 billion financial support agreement with the International Monetary Fund on March 6, 2024, according to estimates from one Egypt-based banker.
The T-bill carry trade has provided the government with an ample, albeit expensive, way to help plug a current account deficit that ran at $5.91 billion in the third quarter of 2024, the latest data available.
It has also provided investors with healthy returns. The central bank has not reduced interest rates, despite a marked decline in inflation.
Some foreign investors have already pared back holdings, pulling several hundred million dollars out of Egyptian treasuries last month after the U.S. issued a broad freeze on foreign aid and said Egypt and Jordan should take in Palestinians from war-ravaged Gaza, bankers said.
In December, the maturing of around $20 billion in nine-month treasury bills resulted in a net outflow of around $2 billion, a second banker estimated.
"The concentration of foreign ownership is relatively low, which should limit the potential outflows," said Farouk Soussa of Goldman Sachs.
"At the peak before last year's sell-off there was something like $18 billion to $19 billion in foreign holdings of local T-bills and bonds. Today, that is more like $10 billion to $11 billion. If anything, there is scope to add EGP exposure, not reduce."
'STILL LUCRATIVE'
Foreign investors use dollars to buy local currency then T-bills, taking advantage of high local interest rates and a stable exchange rate to convert funds back at a profit once the bills mature.
A one-year bill purchased on March 11, 2024, earned an average yield of 32.3%, although this has gradually fallen to 25.6% at the most recent sale on Tuesday. The exchange rate has shifted slightly to 50.7 pounds to the dollar from 49 pounds over the same period.
"We will see some profit taking for sure but others will still stay as the differential continues to be lucrative," said a senior banker, declining to be named because they were not authorised to speak with media.
"I think watching the interest rate and waiting for profit realisation on the back of (interest rate) cut is more tempting," he said.
Others are more cautious. JPMorgan's Gbolahan Taiwo said investors had recently cut their bullish positions in Egypt.
"We roll our maturing Egypt T-bill trade into a 12-month NDF," (non-deliverable forward, or currency trade contract) said Taiwo, adding this would now offer a "decent" yield pick-up. "We expect Egypt's strong performance to continue."
IMF REVIEW
Egypt negotiated the IMF deal following an acute currency crisis and after the war in Gaza ate into tourism and Suez Canal revenues. Canal fees, a main source of foreign currency, plunged to $931 million in the third quarter of 2024 from $2.40 billion a year earlier.
The IMF executive board is due to meet on Monday to approve the fourth review of last year's Extended Fund Facility arrangement, potentially unlocking a $1.2 billion disbursement.
Egypt and the IMF reached a staff-level agreement on the fourth review in December, but final board approval has been delayed in part after Egypt fell short on a primary surplus indicator and asked for a waiver, which is expected to be granted, according to a source with knowledge of the negotiations.
The board on Monday is also likely to approve additional financing under its Resilience and Sustainability Facility, the source added. Egypt expects to receive up to $1 billion from the facility.
The IMF loan followed a record $35 billion investment deal with the United Arab Emirates and coincided with a sharp currency devaluation and a 600-basis-point increase in the central bank's overnight interest rates.
The central bank's Monetary Policy Committee next meets on April 17. ($1 = 50.6200 Egyptian pounds) (Reporting by Patrick Werr; Additional reporting by Karin Strohecker; Editing by Aidan Lewis)
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