Egypt makes progress on reforms but external vulnerability is rising

  • Sharp inflows to local debt have made for a crowded carry trade, with less of a BOP backstop than last year
  • Fiscal consolidation continues
  • But structural reforms have been slower and debt sustainability risks are still high
Egypt makes progress on reforms but external vulnerability is rising

The Egyptian carry trade has been among the largest consensus trades of the past 12 months. Non-resident holdings of government debt fell from US$27.8bn pre-Covid to a low of US$10.4bn in May, but have since rebounded to US$28.5bn as of February, according to the Finance Ministry’s debt management office. Indeed, we named Egyptian T-bills as one of our top trades of 2021 in December.

Foreign holdings

Plans to get local debt settled by Euroclear, which would enable a relisting on JPMorgan’s EM local government bond index as early as H2 21, could trigger further inflows (potentially as high as US$5bn, based on a 2% weighting). However, increasing global risk aversion could put Egypt directly in the firing line if sentiment turns, much like we saw in the wake of Covid. Investor positioning, therefore, makes Egypt particularly vulnerable to another potential taper tantrum.

That said, Egypt has thus far weathered the Covid crisis quite well and its economic outlook has improved in recent months. The IMF completed the first review of Egypt’s 12-month, US$5.2bn stand-by arrangement (SBA) on 7 January, enabling another US$1.7bn disbursement (and bringing total post-Covid disbursements to US$6.4bn, including the emergency funding approved last May).

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