markets

Egypt Investors Now Bold Enough to Look for Dollars Themselves

  • 20-30% of debt-related FX trades go via open market: people
  • Egypt’s pound has been largely stable in the past 11 months

Egyptian one hundred pound notes 

 

Photographer: Shawn Baldwin

Foreign holders of Egypt’s local debt have been using the open currency market more frequently to get dollars. Not only is it a sign they’re more comfortable getting cash out of the country, but it also means the days of a stagnant Egyptian pound may be numbered.

Bondholders traded hundreds of millions of dollars on the interbank market in the first five weeks of 2018, according to people familiar with the matter. About 20 percent to 30 percent of debt-related foreign currency trades are going through the open market, the people said, asking not to be named because they aren’t allowed to speak publicly. The rest are still funneled through a central bank mechanism that guarantees investors can take money out of the country for a fee.

It’s a marked shift for a country where a crippling dollar shortage had made it near impossible for foreign investors to repatriate profits. The crisis prompted policy-makers to float the currency and lift most restrictions in late 2016, but it has taken months for investors to build enough confidence to forgo their money-back guarantee.

With more investors injecting dollars into the interbank market, the Egyptian pound’s volatility will probably rise, said Bilal Khan, a senior economist at Standard Chartered Bank. “Market forces will have a bigger role in determining the exchange rate than before.”

The Egyptian pound, which has halved in value since the float, has been relatively stable at around 18 per U.S. dollar for almost a year.

The Mechanism

One reason why investors are turning to the open market is that dollars have been more readily available. Another is that the central bank raised the cost of using its repatriation mechanism, applying a one percent entrance fee.

Read More: Egypt Clears Multibillion-Dollar Backlog as FX Crisis Fades

Banks have already been using the interbank market for months. Trading in dollars -- almost non-existent before the float -- had reached $9 billion in September, and rose another 60 percent through January, central bank Governor Tarek Amer said last month.

The mechanism was designed to reassure investors who were concerned about profit repatriation. The central bank would buy hard currency from investors, keep it in a special account, then sell it back to them upon exit.

Risk Eases

While it helped encourage foreigners to buy Egyptian local-currency bonds worth $20 billion, the system kept investors’ cash from reaching the market. The International Monetary Fund, which is supporting Egypt with a $12 billion program, has said the repatriation mechanism distorts the exchange rate.

Now that more investors are encouraged to use the interbank market, and dollar liquidity is improving, so too is Egypt’s debt profile, according to Noaman Khalid, an economist at Cairo-based CI Asset Management.

“Investors are seeing less risk in Egypt,” he said. “They are likely to ask for lower returns from Egyptian securities as the central bank cuts rates.”

Read More: Egypt Cuts Interest Rates as Debt Market Seen Defying Fed Impact

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