Fixed Income Analysis /
Egypt

Egypt: Upgrade to Buy after selloff

  • Egyptian credit has underperformed in the recent selloff despite a relatively stable macro outlook

  • This was driven by capital outflow worries given large non-resident inflows to domestic government debt

  • Eurobonds now look attractive on a relative value basis; we upgrade from Hold to Buy

Egypt: Upgrade to Buy after selloff
Tellimer Research
20 October 2021
Published byTellimer Research

As we highlighted recently, Egyptian credit has been a major underperformer in the recent EM selloff. Since mid-September, the Egypt EMBI index is down 6.7% in total return terms versus 4.7% for EMBI Africa and 2.7% for EMBI Global. The selloff has been surpassed only by Argentina and Tunisia and just barely exceeds Ethiopia, Paraguay, and Sri Lanka, most of which are experiencing idiosyncratic crises and a worsening macro backdrop (see here for Tunisia, here for Ethiopia, and here for Sri Lanka).

EMBI

This is despite a relatively stable macro backdrop for Egypt, with solid performance during its Stand-By Arrangement (SBA) with the IMF, which ended in June and largely delivered on its objectives.

Growth has surprised to the upside, inflation remains subdued, and the primary surplus came in higher than expected in FY 20/21. The medium-term outlook is also promising, with the updated IMF WEO forecasting robust growth and fiscal discipline to bring debt below 75% of GDP over the next five years.

WEO

Despite such positive performance, investors’ attitudes towards Egypt have turned notably cautious on the back of large non-resident holdings of domestic debt, with the Egyptian carry trade emerging as a clear consensus trade over the past year. Foreigners now hold nearly US$24bn (24%) of outstanding T-bills, making Egypt especially vulnerable to capital outflows if the EM risk backdrop deteriorates or tighter monetary policy in the US leads to another taper tantrum

Foreign T-bills

Alongside limited progress on vaccinations, rising imports and persistently high fiscal financing needs, Egypt will remain vulnerable over the medium term. More progress on structural reforms, including increased spending on physical and human capital and a reduction in the state’s footprint on the economy, is also necessary to sustain positive growth outcomes.

While the IMF saw the exchange rate as being broadly in line with fundamentals in its July review, a commitment to exchange rate flexibility will also be essential to preserve Egypt’s stability if capital outflows return or if its external accounts continue to weaken, with the current account deficit expanding to 5.5% of GDP in H1 21 from 3.8% in the same period last year.

Current account

While we acknowledge that Egypt’s external vulnerabilities have risen, we think the downside risks are increasingly priced in after the recent selloff. The spread on the EGYPT 5 ⅞ 02/16/2031s has now widened by 100bps since the beginning of June and 80bps since mid-September, roughly twice the respective 55bps and 40bps selloff for its peer group.

Egypt versus peers

Given its disproportionately large selloff, alongside its relatively strong macro outlook (external vulnerabilities and elevated risk of capital flight notwithstanding), we think Egyptian credit now looks attractive on a relative value basis.

As such, we upgrade our recommendation on hard currency debt from Hold to Buy at a mid-YTM of 7.16% for the EGYPT 5 ⅞ 02/16/2031s at cob on 19 October.

Related reading

Fixed income strategy: Top picks for Q4 2021, September 2021

Egypt makes progress on reforms by external vulnerability is rising, April 2021

Fixed income strategy: Our top picks for 2021, December 2020

Discussion with Egypt’s IMF Mission Chief, October 2020

Egypt: Carry trade alive and well once again, July 2020