A pedestrian uses his mobile phone as he passes Egypt’s central bank in Cairo. Non-Egyptians have cut their holdings in the $67bn Treasury-bill market to less than 0.2% from 21% in 2010, according to central bank data. Investors say yields are too low to compensate for the risks in an economy weakened by almost four years of political turmoil.


Bloomberg/Cairo

For all of the gains in Egypt’s financial markets since President Abdel Fattah al-Sisi took over this year, one trend exposes the fragility of the economy: Foreigners want no part of the country’s domestic debt.
Non-Egyptians have cut their holdings in the $67bn Treasury-bill market to less than 0.2% from 21% in 2010, according to central bank data. Investors say yields are too low to compensate for the risks in an economy weakened by almost four years of political turmoil.
T-bill rates have continued to plunge in the most indebted Arab nation behind Lebanon, even without foreign buyers, as local banks sought safety in government securities over loans to customers or companies. Without international investors, Egypt is reliant on handouts from Gulf allies that Citigroup says may start to dry up with falling oil revenue.
“What Egypt needs is for foreign investors to come in and buy T-bills so banks can focus more on the business of lending to corporates as growth picks up,” said Denise Prime, who helps oversee $6.5bn of emerging-market debt as an investment manager at GAM International Management Ltd in London. Egypt isn’t among her funds’ holdings. “The potential upside in Egypt’s turnaround story is far more limited on the fixed-income side.”
Growth in the $272bn economy, North Africa’s biggest, has fallen to about 2% a year since the revolution in Tahrir Square in 2011, the slowest in more than two decades. Egypt’s pound has depreciated by 19% in the official market and by 25% in the black market, which was born out of a shortage of dollars. The budget deficit has grown to almost 13% of gross domestic product, one of the highest levels in the Middle East.
Average auction yields on one-year T-bills have dropped by 3.62 percentage points since July 2013, when the military removed an elected Islamist government from power. The 11.79% average yield at Egypt’s on December 18 debt auction compares with 12.31% for Brazil at its most recent sale of one- year securities last month. Standard & Poor’s rates Egypt’s short-term local-currency debt two levels below Brazil’s at B. Equally-rated Nigerian debt yielded an auction average of 15.99% this month.
Returns are further squeezed by a 20% tax, twice the rate on equities, and the cost of non-deliverable forward, or NDF, contracts to hedge the risk of further currency depreciation. The final return may be trimmed to as little as 1.25%, according to Commerzbank.
Egyptian notes “are some of the best investments in the Middle East and North Africa region if investors are willing to go in without the NDF hedge,” Apostolos Bantis, a Dubai-based credit analyst at Commerzbank, said in a phone interview. “But they’re not ready to do that yet. A lot of them still have images of Tahrir Square and instability in their heads.”
For local banks, Treasuries are the surest way to earn a return from surging deposits as Egyptians save in case of further turbulence. As of September, the loan-to-deposit ratio at banks in Egypt was near the lowest since at least 2000, according to the most recent central bank data. Their share of the Treasury market has grown to 76% from 56% four years ago.
Commercial International Bank Egypt, the nation’s biggest publicly traded lender, reported record quarterly earnings last month, helped by increased holdings of government debt.
While avoiding the Treasury market, foreign investors poured about $650mn into equities between June and September, more than 10 times the net flows to T-bills, according to the stock exchange and central bank data. Non- Egyptians accounted for about 16% of share trading this year. The EGX 30 Index has gained 28% in 2014, fifth best globally among 93 indexes tracked by Bloomberg. The government’s 5.75% Eurobonds due April 2020 have surged this year.
Equity-market optimism has been stoked by more than $15bn of aid provided by Gulf nations since July 2013 and the prospect of economic growth accelerating to 3.5% for the current fiscal year to June 2015, according to the average of 9 economist estimates compiled by Bloomberg. Reductions to fuel subsidies in July may help officials trim the budget deficit to 10.5% this year. The central bank has stepped in to halt the pound’s depreciation, holding the rate at 7.15 per dollar in the official market since June.
“The stock market usually moves ahead of the economy,” Hany Farahat, a senior economist at Cairo-based CI Capital, said by phone. Improved confidence will enable the government to sell more debt that matures in longer than a year, which will reduce Egypt’s vulnerability to swings in investor sentiment, he said.
Egypt’s growing demand for dollar inflows means it’s still likely to need foreign investors to return to its domestic debt market. The 47% plunge in crude from this year’s peak in June may limit further Gulf nation aid, Farouk Soussa, the chief Middle East economist for Citigroup Inc, said in an interview from London last month.
“Egyptian T-bills aren’t as attractive as they once were,” Lutz Roehmeyer, a money manager overseeing $1.1bn of emerging-market debt at Landesbank Berlin Investment GmbH in Berlin, who exited the Egyptian T-bill market in 2012, said by phone. “The main factor in Egypt’s economic stability is support from its Arab neighbours, which is unsustainable. Sooner or later, Gulf aid will stop and Egypt has to be able to stand up on its own.