Egypt turns a corner
Economic reform sets country up for greater foreign investment as 30-year bond is oversubscribed and IMF looks set to release second tranche of loan, but tight capital controls still hamper business activity
Foreign investors have given Egypt’s package of economic reforms the thumbs-up. The country is celebrating a successful eurobond issuance after its government headed to international debt markets for the first time since 2015, in a bid to attract investors and support its finances.
The 30-year bond was oversubscribed, suggesting improved investor appetite as well as faith in the country’s long-term potential, officials said.
Egypt issued US$4bn of international bonds, which UK-based research group Capital Economics says was almost double the amount the Egyptian authorities had originally wanted.
Hany Farahat, senior economist at Cairo-based investment firm CI Capital, says the appetite of foreign investors is huge: “It shows investor confidence in Egypt’s recovery.”
The country is using the opportunity to increase its borrowing. Finance minister Amr El-Garhy says Egypt may issue bonds in other currencies, including the Japanese yen and China’s yuan. El-Garhy embarked on a roadshow that began in Dubai before heading to New York, Los Angeles, Boston and London.
“With the bond sale under its belt, Egypt should comfortably meet its external financing needs over the next 12 months,” said UK Capital Economics, which also noted that this signals that investors have welcomed recent economic reforms.
In November last year, Egypt liberalised its currency regime and let the pound rate be determined freely by banks.
It has been brutal, as the currency has shed half its value since then.
The decision to free-float the currency was in part motivated by pressure from the International Monetary Fund, which was in Cairo last week to prepare a review that would pave the way for the release of a second tranche of its $12bn loan to government.
At the same time, Egypt has also proposed cuts to energy subsidies. And it has introduced Vat for the first time, at an initial rate of 13%.
But until January’s successful bond issue, it was unclear whether better sentiment would yield badly needed foreign currency inflows.
“The timing was favourable,” says Farahat, “coming after the major reforms including the devaluation, Vat, energy subsidy cuts and the IMF loan agreement. It shows the downside risk to the macro outlook on Egypt has gone down to a minimum. If this had taken place last May, it would not have been as successful, in my view.”
Despite the positive dynamics at play, the Egyptian pound (LE) has not recovered any of its lost value against the US dollar over the past weeks, and is still hovering above LE18.5.
Egypt has been battling a severe dollar shortage because of sluggish tourism, lower remittance payments and a lack of foreign investment. In response, the Central Bank had instilled capital controls so restrictive that it put a damper on what was left of normal business activity.
Authorities expect the dollar inflow from the bond issue to alleviate this situation, strengthening the pound and leading to the easing of capital controls.
This will take time, Farahat says, but he is convinced Egypt is on the right path.
“The inflow of dollars is not yet enough compared to pent-up demand ... that had accumulated over the past few years [and] coincided with historical lows on the supply side if you look at key balance of payment.”
With expectations for a recovery in remittances, tourism, foreign inflows and export revenue Farahat is confident that “the appreciation [of the pound] is a matter of when rather than if.”
The remaining piece of the puzzle would be the lifting of overly restrictive capital controls.
“This is the key element that we are awaiting in 2017 in order to gain confidence that this positive trend is a long-term one,” Farahat says.