Egypt, the Middle Eastern giant with a population of 114 million, is too big to fail, particularly at this moment.
The United Arab Emirates, International Monetary Fund, and European Union forcefully underlined this point over the past week, pledging some $40 billion in investments and loans.
President Abdel Fattah Al Sisi’s government responded with drama of its own, letting its pegged currency devalue by more than a third and hiking interest rates by six percentage points, to 27.75%, to battle inflation. That set up an enticing play for bond investors, who can reap yields above 30% on nine-month paper in stabilized Egyptian pounds. For now, “We see the appeal of it as a short-term trade,” says Razan Nasser, an emerging markets sovereign analyst at T. Rowe Price. “Beyond one year, we would look for signs of commitment to real structural changes.”
Egypt has been rocked by recent geopolitical ructions. The world’s top wheat importer, it suffered after Russia’s 2022 invasion of Ukraine drove up grain and fuel prices. Houthi attacks on Red Sea shipping have cut Suez Canal fees by close to half. The wider crisis in Gaza has curtailed tourism, Egypt’s other top currency earner.
The U.A.E. kicked off the multinational rescue effort, pledging a $24 billion down payment on a London-size resort slated for virgin Mediterranean coast in western Egypt. Cairo took advantage of the cash anchor to let the currency, and related currency controls, go. The IMF responded with a $9 billion-ish loan package. The EU proposes kicking in another $8 billion.
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The currency float is reviving an all but moribund Egyptian financial sector, says Ahmed Hafez, head of research at Beltone Securities in Cairo. “Banks are starting to clear backlogs and make loans available,” he says. So far, so good—with the emphasis on so far. Egypt enters its bailout with a budget deficit pushing 7% of gross domestic product and inflation galloping around 35% annually. Paying 30% interest on its bonds has swelled debt servicing to 60% of state revenue, Nasser says. “They still have to do the harder parts, rein in fiscal policy and allow the private sector to come in,” says Rajeeb Pramanik, senior emerging markets strategist at BCA Research.
Sisi’s technocrats cut back heavily on fuel and other consumer subsidies during a previous reform round in 2016-17. The current budget bloat is driven more by inefficient state-owned companies and expensive infrastructure projects.
Reining these in may prove more challenging still, as it affects Egypt’s military, whose economic tentacles reach across the economy. “It’s not clear that Sisi can maintain power if he pushes the military out,” Pramanik observes.
Financial stocks like
Commercial International Bank-Egypt
(ticker: COMI.Egypt), the No. 2 name in Egypt’s index, could in theory benefit from unclogging the currency arteries. Two vibrant financial technology companies,
E-Finance for Digital & Financial Investments
(EFIH.Egypt) and
Fawry for Banking Technology & Electronic Payment
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(FWRY.Egypt), also rank in the top 10. But political question marks are making equity investors, whose time horizon generally stretches to a few years, cautious. “We’ve gone from zero to initiating exposure,” says Jonathan Binder, chief investment officer at frontier market specialist Consilium Investment Management.
Egypt could also surprise on the upside, argues Carlos de Sousa, emerging market debt strategist at Vontobel Asset Management. Letting the currency float might actually decrease inflation by making imported goods less scarce and prices more competitive. “Everything we have been waiting for over the past year and a half is happening,” he says. “It’s attractive but not a slam dunk.” B