Egypt’s Foreign Holdings of Local Debt Recover 64 Percent From April’s Trough but Stay Below February’s Record
Non-resident holdings of Egypt’s local currency government debt reached 36.4 billion dollars by 24 June, recovering most of the ground lost in a sharp reversal earlier this year but still short of the record 39.1 billion dollars reached in February, according to the International Monetary Fund’s latest review of Egypt’s program, published 13 August.
From Record High to Sharp Reversal and Back
Foreign holdings of Egyptian local currency government debt hit a record 39.1 billion dollars on 18 February, as portfolio inflows had been building steadily. A deterioration in global risk sentiment toward emerging markets, combined with heavy treasury bill maturities in March, then triggered a sharp reversal, and holdings fell to 22.2 billion dollars by 8 April, a decline of about 43 percent from the record, on our calculation. Holdings then recovered gradually through May and June, reaching 36.4 billion dollars by 24 June, a rebound the review links to renewed investor appetite following the signing of a U.S. Iran agreement.
On our calculation, that recovery amounts to a 64 percent rise from the April trough, and represents about 84 percent of the dollar amount lost between the February record and the April trough. The remaining gap to the record is 2.7 billion dollars, or about 7 percent.
Currency and Spreads Have Recovered Further Than the Debt Holdings
The same capital outflows drove a sharp exchange rate depreciation of about 14 to 17 percent from peak to trough in March. As portfolio inflows resumed, the pound recovered most of that ground, leaving it only about 2.5 percent weaker than before the conflict as of the report date. Egypt’s sovereign bond spreads staged a more complete recovery: they widened temporarily after the war began, then narrowed steadily and had fallen below their pre-war levels by June, according to the IMF.
| Non-resident local debt holdings | Value | Change |
|---|---|---|
| Record, 18 February | $39.1 billion | n/a |
| Trough, 8 April | $22.2 billion | -43% from record |
| Latest, 24 June | $36.4 billion | +64% from trough |
The three indicators tell slightly different stories: sovereign spreads have already more than normalised, the currency has recovered most of its loss, and non-resident holdings of domestic debt have regained most, but not all, of what they lost.
The same review put Egypt’s current account deficit at an estimated 4.5 percent of GDP for the fiscal year that ended in June, with record remittance inflows, robust tourism receipts and a gradual recovery in Suez Canal revenue helping offset higher oil and gas import costs; the deficit is projected to narrow further, though the review does not give a specific figure for the new fiscal year in the text reviewed. Headline inflation eased to 14.3 percent in June from a March peak of 15.2 percent, while core inflation also stood at 14.3 percent. Gross international reserves stood at 119 percent of the reserve adequacy metric by end June. Real GDP growth is estimated at 4.6 percent for the fiscal year that ended in June and is projected to moderate to 4.4 percent in the current fiscal year, an effect attributed to the lagged impact of the war, including weaker investment and higher input and financing costs.
Why it matters
Portfolio inflows into Egyptian debt, sometimes called hot money, are one of the main sources of foreign currency Egypt uses to fund its current account deficit, alongside foreign direct investment, tourism and remittances. A 64 percent rebound from the April trough shows the recovery in these flows is well advanced, but the remaining 2.7 billion dollar gap to February’s record, even as sovereign spreads have already normalised, shows it is not yet complete, and that different market indicators appear to be normalising at different speeds.
Outlook
The main downside risk flagged for Egypt’s external position is a renewed escalation of regional tensions, while a renewal of the U.S. Iran ceasefire arrangement could ease energy prices and support the recovery further.
Sources: International Monetary Fund.
