Egypt’s inflation is under significant pressure due to an adverse international environment.

After the recent currency depreciation, the government hopes to make domestic debt attractive again.

We like the long end of the hard currency curve better than unhedged domestic currency instruments.

For the fourth time in six years, Egypt has requested borrowing from the IMF as the country is suffering an external shock triggered by the war between Russia and Ukraine.

Egypt could qualify for any IMF program, and it would be subject to higher scrutiny because the country has exceeded its borrowing quota.

We welcomed this move as a preemptive measure to get extra resources considering the expected drop in tourism revenues and the fleeing of investors from Egyptian debt.

Our base scenario is that the IMF will not require a restructuring of Egypt's debt.

The Russian invasion of Ukraine will hurt Egypt in many ways: higher import bills, higher inflation, lower tourism revenues, and pressures to devalue the currency.

The cost of wheat imports will rise by almost USD 1 bn. Authorities have hinted they will reduce the number of people eligible for the popular bread subsidy by 75%, delivering savings of at least USD 2 bn.

The recent rally in oil prices will be negative for the country. Oil-related imports amounted to 1.9% of GDP in 2021.

Before the war, Russians and Ukrainian tourists were expected to represent almost half of the total tourists visiting the country this year, ...

Inflation jumped from 5.9% to 7.3% in January, pressured by the increase in commodity and raw material prices.

The MPC decided on February 3, before the latest inflation figures had been published, to hold the interest rate.

Egypt remains one of just a handful of large emerging markets that have not raised rates in the past year.

We believe it is likely that inflation will keep accelerating, and there are also rumors of a devaluation of the currency.

The government might decide to reform food subsidies, which currently amount to 1.6% of GDP.

BUY: Despite risks arising from the increasing inflation, we still li...

President Al-Sisi has consolidated his grip on power, allowing the strongman to turn his attention to economic and geopolitical issues.

Egypt is playing a mediator role in some key regional controversies, while being an active player in some others, including the standoff over the Ethiopian mega dam.

We are optimistic about the country’s fiscal position and expect the fiscal deficit to be cut to 6.1% in the 2021/22 FY thanks to higher-than-expected revenues.

Egypt will register strong economic growth of 5.2% this FY, even though we expect a moderation in the growth rates in the second half of the fiscal year.

...

Both countries’ bonds have performed poorly in the last month, with their yields increasing between 35 and 40 bps on average.

Their sovereign curves are very similar, with Egypt’s being slightly steeper.

Given the economic fundamentals and political (in)stability, we see more value in the  short-end and belly of Egypt’s curve than in Nigeria’s.

The government is expecting to increase its revenues by 2% of GDP in the next four years.

Revenues as a % of the GDP has been stagnant in the last three fiscal years, however, there are signs that FY 2021/22 would be a game-changer.

Expenditures are aligned with the reform package announced in May, which seeks to boost economic growth.

Even though domestic debt is high, Egypt is successfully implementing a debt management strategy that would reduce pressure in the long-term.

Thanks to its high positive real interest rates and relative stability, Egypt remains an oasis in the desert.

BUY: The solid fundamentals...

For a long time, Egypt has strived to develop its local debt market by maintaining a high real interest rate, notably increasing foreign holdings of local Egyptian debt.

Nevertheless, the attractiveness has been eroding because of rampant inflation, which has reached highs from twenty months ago.

The main cause behind this trend is the surge in food prices, especially in cereals, as Egypt is a major net importer.

Authorities had opted to keep an unchanged interest rate given that inflation continues within the central bank’s range, but this could change in the last months of 2021.

Despite the accelerating infl...

The Egyptian economy managed to avoid a recession last year, and we expect its good performance to continue looking forward. 

The IMF is fully supporting the country’s recovery as it returns to the growth path.  

Egypt recorded tourism revenues of USD 4 bn in the first half of 2021, as the country received 3.5 mn tourists.  

We believe the country has already turned the page and expect GDP to grow 2.7% in FY 2021. 

The rainy season, which lasts from June to September, has arrived, reviving disagreements about the filling plan for the Ethiopian Mega Dam (GERD).

Egypt’s irrigation minister said that they had received official information that Ethiopia is filling the reservoir behind the GERD, making it the second straight year this happens.

The Egyptian foreign minister recently discussed the issue with his Chinese counterpart, in what seems an attempt to involve China in the issue.

Daily infections are decreasing in Egypt after authorities introduced some light measures. Nevertheless, cases are likely being under registered.

The vaccination campaign is off to a slow start in the country, with just 2.6% of the population having received at least one dose, but according to the health minister, 100% of tourism workers have been vaccinated.

Tourism revenues went from 11.9 bn in FY 2018/19 to USD 9.8 bn in FY 2019/20. For the first two quarters of the 2020/21 FY, these revenues have plummeted 75.3% in YoY terms.

The government is trying to promote Egypt as a tourism safe spot, and although there has been...

We focus on the largest African commodity exporters within the EMFI universe, which would benefit from the current price boom.

The benefits of a bull commodity cycle will enhance liquidity buffers and help improve fiscal accounts, but getting countries back on a debt sustainability path takes more than that.

The emerging countries that benefit must take advantage of the tailwinds to undertake structural changes that can improve long-term solvency.

Authorities announced a new reform package, following the 2016 success which achieved a GDP recovery coupled with a general improvement in macroeconomic indicators.

This time the reforms are focused on making growth more resilient and inclusive, mostly by targeting greater participation in the non-oil economic sectors.

We think that the goals are ambitious for a 3-year time horizon, especially because of the large investments required.

Likewise, we do not discard new tax hikes, even if authorities have so far denied it is part of their plans.

BUY: Egypt achieved a primary fiscal surplus and liquidity indicators...

There have been concerns in the U.S. Congress about Biden’s approach to Al-Sisi’s administration.

Biden approved a missile sale to Egypt, but it signed a petition with other Western countries urging an end to human rights violations.

Truth is that, despite the accusations, Egypt is a strategic ally, and the U.S. has provided them with more than USD 50 bn in assistance since 1978.

We do not expect a major pushback against Egypt’s rights abuses, as China’s presence in the country grows.

BUY: Egypt provides an attractive risk/reward combination, remaining an interesting choice for those who are ...

Foreign holdings of local debt have recovered from their collapse in early 2020, climbing to USD 28.5 bn in February from USD 10.4 bn in May last year.

The main reason behind this recovery is the high real interest rate that Egypt offers, currently around 4%.

The next Monetary Policy Committee meeting is scheduled for March 18, and we believe the rate will remain unchanged due to the recent evolution of inflation.

Another chapter of overvaluation remains as a latent threat given that most of the competitive gains from the 2016 devaluation have already vanished.

BUY: The carry and roll down profile of the back e...

Commodity prices have performed spectacularly after the chaos of March 2020: Precious metals (+ 25%), Gas (+ 66%), Oil (+ 254%), Copper (+ 93%) and Coal (+ 74%)

Some short-term conditions such as the stimulus packages of the main economies, inflationary risks and the weakness of the dollar promote a rise in real assets

Increased industrialization in India and the maintenance of government spending at high levels, support the boom in the long term

For now we know that there is a rise in prices, but there is no certainty that there will be a supercycle of several years because all the long-term factors are variable

Of...

We continue to find high carry in Egyptian treasury bills attractive, given sustained high real rates 

Our forecasted deterioration in the current account this fiscal year forces us to evaluate the cheap hedge given by USD/EGP forwards. 

We like picking up some protection and locking in 5.05% USD annualized rates in the 6 month treasury bill. 

There are no scheduled elections for this year after  Al-Sisi secured his majority position in the Senate in 2020.

Although there is a realignment of opposition voices developing, we do not think that it will become a threat to the government.

Likewise, we believe that there will not be international backlash this year either, despite allegations of human rights violations.

We estimate that the fiscal deficit will decrease from 8.3% of GDP in FY 2019/20 to 7.3% of GDP in FY 2020/21.

The second wave of COVID-19 represents a major threat to the Egyptian economy.  We believe that real GDP will grow ...

Al Sisi’s administration took advantage of the pandemic to tighten his grip on power.

Egypt ranked 125th out of 128 countries in the World Justice Project Rule of Law Index.

The worst score among the different categories was in “open government,” a reasonable result given the high opacity with regards to the use of public funds.

Biden’s new approach has generated a lot of expectation, especially after declaring on Twitter that there are “no more blank checks for Trump’s favorite dictator”.

BUY: Even if yields have kept tightening, an attractive risk/reward combination, espec...

We take a comprehensive look at political risk indicators in a group of Emerging Market countries, trying to identify potential sources of conflict.

We analyze the electoral scenarios in the four Latin American nations that will have electoral processes during the end of 2020 and all of 2021.

We review the scenarios in the parliamentarians of Argentina and El Salvador, we comment on the electoral process that will take place in Venezuela, and we review the perspectives of the presidential elections in Ecuador.

We evaluated the World Bank’s governance indicators for our sample countries in 2019 and share our view of thes...

According to the IMF, the fiscal cost of COVID-19 response measures is only 0.5% of GDP.

We estimate a primary surplus of 1.5% of GDP and an overall deficit of 8.4% of GDP for last fiscal year, virtually unchanged from previous year’s numbers.

For the FY 2020/21, which started in July, we expect that the fiscal deficit will decrease to 7.4% of GDP.

Financing needs remain large, 10.8% of GDP, but Egypt’s recent agreements with the IMF and other multilaterals bring confidence.

We maintain our BUY recommendation on Egypt: Egypt traded well bid during October and the first week of November as the curve ...

In the first quarter, Egypt posted a 1.24% decrease in its debt-to-GDP ratio – the first q-o-q fall in years – but the pandemic hit and the government is again increasing its debt to finance a response.

We estimate that the debt-to-GDP ratio will close the year at 88%, which would move the country away from its goal of reaching 82.7% by 2021.

On the other hand, we expect a 2.7% GDP growth to significantly outperform the country’s regional peers, which are expected to contract around 4.7%.

We like the 47 and 49, as they provide the best returns for a flattening of the curve and we keep our BUY rating

Egypt has been praised by rating agencies and top financial firms over its macroeconomic framework.

According to officials, GDP grew by 3.5% in the FY 2019/20, with the non-oil economy experiencing a V-shaped recovery after the plunge in April.

Inflation is stable, supported by a slight appreciation of 1.8% of the EGP from June to August.

Foreign reserves have climbed up again from USD 36 bn in May to USD 38 bn in August.

Despite these good signs, the depressed tourism sector is still a drag on the economy.

We upgrade Egypt to BUY, given that the Central Bank still has ample room to cut rates reinforces our co...

In April 2019, there were approved constitutional amendments that allow Al-Sisi to stay in office until 2030.

Upper house elections were held on August 12 and it did not make much noise mainly because of two reasons: it was unlikely to provoke a change in the stagnant political outlook and because of the expected apathy from the voters.

Only 14.2% of eligible voters cast their ballots.

We think is unlikely to see big demonstrations in the short-term.

Otherwise, the response from authorities will be immediate as securities agencies enjoy additional powers after the amendment approved on May 7.

HOLD: liquidity r...

Egypt’s high real interest rates present a good opportunity for carry trade plays

We take a look at Egyptian treasury bills, as the best way to invest in high yielding Egyptian pound.

Relative cheap USD/EGP hedge can be found in Forward contracts, which allow to lock in 3%-3.5% dollarized annualized rates on the carry

Even though the country is undergoing moments of political uncertainty, we are constructive on Egyptian macroeconomic framework.

In the fiscal year 2019/2020, the government reported a fiscal deficit below the budget estimates, but this is only because of the good results from July 2019 to January 2020.

The country has to face at least three challenges in the next fiscal year: the intensification over the Libyan war, water shortages threat because of the Ethiopian mega dam and the lack of tourism revenues.

Egypt does not figure in the EU’s safe-countries list, making difficult a real recovery in tourism despite the restart in airports operations.

Egyptian parliament approved the deployment of armed forces against “foreign terrorist elem...

Tensions between Egypt and Turkey are growing as the Libyan Government of National Accord (GNA), backed by Recep Erdoğan’s government, marches towards Sirte, the Libyan city that is also called “oil crescent” by being a strategic gateway to oil reserves. With the president Abdelfatah Al-Sisi warning that any attack to Sirte will cross a “red line”, we weighed the Egypt’s interests on Libya and gave our vision about a probable war with Turkey.

Low interest rates and the hunt for yields of the last decade has left broad swaths of EMs overindebted and vulnerable.

The first half of 2020 is not yet over and we already have 3 countries in default.

The recent record of most defaults on Eurobonds on a single year was 4 in 2017, so 2020 is not far from setting new records.

Eurobond restructuring processes are usually among the most complicated due to the variety of holders and the different interests they represent.

Suriname, Zambia, Belize, Sri Lanka and Angola are in the most risk to engross the default-statistic for the year.

Last month, the Central Bank of Egypt announced that foreign currency reserves lost USD 3.7 bn in April. Just today, authorities declared another fall of USD 1.0 bn.

Since the Covid-19 pandemic started, the total drop reaches USD 9 bn, which represents a fifth of the reserves stock reported just in February.

The Egyptian pound has remained stable at EGP 15.7 /USD, fueling concerns of another currency shortage episode, like the country experienced in 2014/15.

In EMFI Securities we do not think that this is an alarm sign yet.

The general picture is completely different than the offered in 2015: Egypt's external fi...

May was one of those months that feels like a year. We had a default in Argentina, a tense election in Suriname, a deadly pandemic still spreading around the world, and yet, it was a good month for emerging market debt

Our EMFI Core Index went up for the first time in 6 months. The biggest winners were Argentina, Angola and Ecuador, while Venezuela, Suriname and Sri Lanka were among the negative outliers that went against the general risk-on mood

The macro and fiscal situations deteriorated further for all countries covered, and we chronicled the dramatic economic crash in our Country Reports

We’ve been preparing fo...

As of May 22, 8 countries have at least one USD-denominated sovereign bond trading below 50 cents on the dollar.

The Covid-19 crisis could lead to a new wave of sovereign defaults from prolonged confinements.

We discuss the worst debt restructuring events so far this century.

Argentina 2005 remains at the forefront of these events if we exclude the exceptional cases of countries at war or leaving them.

The countries with the most compromised solvencies that could generate problems with their debt are Angola and somewhat behind, Sri Lanka, El Salvador, Egypt and Pakistan.

A pandemic year was on the cards, the dramatic magnitude of its effects was not.

The global economy is expected to shrink by 3% in 2020, but leading indicators are pointing to a deeper downturn.

Emerging countries with a history of volatile economic growth will show the worst results.

Some economies may experience a period of above-trend growth during the recovery, although the level of GDP will remain, in most cases, below the pre-virus level.

Pakistan is the weakest among the EMFI Countries, in terms of the spread of the virus. Lebanon, Sri Lanka and Barbados are the strongest, with a controlled increase rate and a persistent lockdown.

The countries that we evaluate with the worst economic performance year-to-date are Angola, Venezuela, Lebanon, Barbados, El Salvador, Ecuador, Sri Lanka, Argentina and Suriname.

Since the end of 2019, the local currency has depreciated -70.5% in Venezuela, -52.4% in Lebanon, -43.5% in Argentina and -40% in Suriname.

El Salvador and Argentina launched the most ambitious fiscal program among our sample, which will cost 6% and 5.6...

Budget for FY 2020/21 (starting on July 1) was drafted in an early stage of the outbreak, it is likely to underestimate the fiscal effects of the pandemic.

Fiscal deficit stood at 8.1% of GDP in FY 2018/19, but the outlook for the current fiscal year is disastrous.

For the last months of FY 2019/20 there will be lower tax revenues and scaled-up spending, our preliminary estimates suggest that the deficit will climb up to 8.4% of GDP and a slight primary deficit of 1.5% of GDP.

We expect a balance between social spending for the health and education sector together with greater cuts in other subsidies for the FY 2020/21, a...

US stocks rose 12.7% in April, while US investment grade bonds rose 4.6% and EM bonds 4.0%.

Our EMFI Core Index fell 0.9% over the month and is 27.1% down YTD.

The best performers of April were Egypt (+4.7%), Sri Lanka (+4.0%) and Turkey (+3.8%).

The worst performers were Suriname (-26.9%), Lebanon (-14.0%) and El Salvador (-11.3%).

The IMF has approved just over USD 16.0 bn for 61 countries.

Of the 16 countries we follow, 6 have already been granted financing for a combined USD 3.5 bn.

Lebanon and Argentina presented restructuring proposals asking for large debt relief but not offering much adjustment.<...

On April 15, the G20 agreed on a standstill for bilateral debt service during 2020. Nonetheless, the agreement only applies to IDA-eligible countries. The suspension will be NPV-neutral and will involve repayment over 4 years, including a 1-year grace period.

Multilaterals haven’t found a way to implement a similar standstill. In fact, Fitch Ratings warned them that joining in on the G20 standstill could result in rating downgrades if not appropriately compensated by shareholder countries.

On aggregate, official creditors account for almost 90% of the debt of low-income, and 60% of that of lower middle-income countries, b...

Two weeks ago, we singled out some early calls for a generalized global debt moratorium in our Global Strategy Viewpoint: Force Majeure. The idea has gained significant traction and is becoming one of the main themes in economic and financial discussion.

While we don’t think a generalized moratorium on commercial bonded debt is likely to succeed, investors should be aware that it is a growing theme and bondholders will probably be under increased pressure to accept attempts at restructuring bond terms.

There are some indications that China is a significant roadblock for the IMF-World Bank initiative for a bilateral debt m...

For Egypt, stopping touristic activities pose a risk for the economy: 4% of GDP was made up by revenues from tourism over the last year.

President Abdel Fattah al-Sisi announced on March 22nd the allocation of USD 1.2 bn to support the stock exchange, the reduction in electricity prices and taxes on factories and tourists facilities, among other measures.

Remittances would be affected too. Many economists argue that the current crisis is worse than 2008-09, and back then, remittances declined by 9%.

The minister of tourism, Khaled el-Anani, on March 16th, said that the lockdown will trigger losses that could reach up to U...

The COVID-19 crisis is raising a difficult question of public policy for emerging market economies with low fiscal space, which have to reconcile economic and social policy with debt service.

The relation between liquidity and solvency problems is not straight-forward: the COVID-19 shock, which presents liquidity challenges first and foremost, can unearth underlying solvency problems and can also turn liquidity problems into solvency ones if improperly managed.

We’re already seeing some early calls for an international debt holiday to exempt countries from paying during the COVID-19 crisis. Multilateral organizations are ...

Political tensions on the doorstep and a complicated fiscal deficit, Egypt and Ukraine have some similarities despite the obvious differences with which they are associated.

The latest cabinet changes and delays in key reforms in Ukraine are misinterpreted by the markets.

Despite the high deficit and the magnitude of the next payments, Egypt has reserves almost twice as large as Ukraine.

There may be an opportunity to enter the current prices of Egypt, with lower than those of Ukraine and with better yields.

In any case, the impact of the pandemic still seems unpredictable for both countries.

The current crisis will translate into twin demand and supply shocks, with an oil price war on top of it.

The demand shock driven by declines in the world’s main trading partners will particularly affect emerging markets which are characterized by low diversification of exports and production.

Supply chains around the world have been disrupted by factory closures, first in China and now in Europe and the US.

The markets most exposed to a potential slowdown are the major commodity exporters: Venezuela, Ecuador, Angola and the markets most reliant on Chinese and US tourism.

In most EMFI countries the tourism act...

Our EMFI Core Index has fallen 27.6% year-to-date (YTD), while Our EMFI Expanded Index has fallen 19.2%. The last two weeks have been particularly bad, with consecutive 10% declines.

Unsurprisingly, countries heavily reliant on oil have suffered the most. Among our 34-country group, almost every oil-reliant one has fallen more than the 18.3% median.

The second thing that jumps to the eye is that the riskier countries have fared proportionally worse than relatively safer countries, when excluding oil-dependent countries.

We’re also seeing several countries crossing the 10% yield threshold, usually associated with dis...

The outbreak of the Coronavirus, as well as the “oil price war” between Saudi Arabia and Russia have triggered almost complete certainty that a global recession is coming over the next quarter.

Some economists are expecting a 2-quarter rolling recession, but there is potential for the downturn to extend further if the virus reemerges after activity is unfrozen.

Emerging market debt is taking a beating in 2020 so far. The countries we cover registered a median 14.3% fall year-to-date, with the worst performer doing as bad as 60.3% down (Ecuador) and 38.5% down (Angola).

We compare indicators on 4 major categori...

Although the IMF program carried out a better outlook for fiscal figures, Egypt’s government still has to watch out for other issues.Given that the oil and natural gas sector are the main exporting sectors of the country, Egypt remains exposed to external shocks that would affect the prices of both commodities.

There is an important gap between oil and gas output and domestic consumption, which implies that Egypt relies on imports to cover the demand.The fiscal deficit went from 11% of GDP in FY 2014/2015 to 6.8% in FY 2018/2019. Despite the fact that there is still a long way to go, there’s been a remarkable improvement....

February was a bad month for EM debt, as the market went into risk-off mode pushing bonds to backtrack on the gains made over the previous two months. 11 out of the 15 countries in our EMFI Core Index fell on the month, while the weighted index itself fell 5.8%, retracing below December levels.

Our Expanded Index ex. Core confirms February’s sell-off, registering declines in 21 out of 25 countries and an aggregated fall of 0.9%. Nonetheless, this fall is significantly below that of our EMFI Core Index.

Our selection of countries is clearly biased towards some large and risky high-yielders, which translates to an expectabl...

Egypt stands out for being sixth in the African ranking of the largest proven oil reserves with 3.3 billion barrels and the third in proven natural gas reserves with 75.5 trillion cubic feet. Oil and gas production, together with oil refining, accounts for almost 30% of total GDP. On the other hand, exports of both commodities constitute 40% of the total. Broadly speaking, the growth of the economy is largely linked to the performance of oil and natural gas activities.

Natural gas production decreased 32% between 2010 and 2016, together with a decrease in proven reserves – as a result of maturing oil fields and a lack of new di...

On December 10, Egypt’s Central Bank published the inflation print for November. The inflation rate accelerated for the first time in five months, increasing by 3.6%, which gives the bank little reason to reverse a cycle of monetary easing. In October, the inflation rate slowed to its lowest level in more than nine years.

Despite the acceleration, inflation was lower than expected according to the authorities, and remains below the target range of 9%, +/- 3 pp, by the end of 2020.

The central bank has reduced rates four times this year, reflecting confidence that authorities have brought inflation under control which seem...

This Wednesday, December 4, during a cabinet meeting government launched several initiatives in cooperation with the Central Bank of Egypt (CBE) to support the industrial sector, housing, and boost investment as part of its economic recovery program.

These measures are the most recent push of the government to stimulate competitiveness and growth in private sector, a key element in the next stage of the economic program launched at the end of 2016 with the devaluation of the currency.

The IHS Markit Egypt Purchasing Managers ’Index (PMI) — which reflects the conditions of companies in the non-oil sector–  ...

On Monday, by the rating agency Fitch Ratings  kept unchanged the long-term foreign currency debt rating of Egypt in B+ with stable outlook. This decision is backed by the recent history of economic and fiscal reforms and improvements to macroeconomic stability and external finances.

In order for Egypt to obtain an improvement in its rating, Fitch indicates that it requires improvements in governance standards, business environment and per capita income; also of sustained progress in fiscal consolidation that may lead to a reduction in the Debt to GDP ratio. On the other hand, if tax reforms are reversed, the deficit is maintain...

On July 24, 2019, the IMF Executive Board informed the conclusion of the economic reform program after the fifth revision and therefore the last outstanding disbursement. David Lipton, Director and Manager of the Board, said that "the outlook remains favorable and provides a timely juncture to further advance structural reforms to support more inclusive growth and job creation led by the private sector."

Although fiscal figures have improved, local media claim that the IMF failed to secure a path for sustainable growth and people’s purchasing power is decreasing. Similarly, although Al-Sisi's administration is now...