Egyptian Bonds Jump on UAE Deal، Pound Gains on Black Market

Egypt’s dollar bonds surged and its pound strengthened in street trading، as a landmark $35 billion investment deal with the United Arab Emirates stoked optimism that the cash-strapped nation will ride out its economic crisis. 

Egyptian debt due in 2032 and 2033 each rose more than 5 cents on the dollar — their biggest-ever jump — after the agreement raised the likelihood that a much-awaited currency devaluation is imminent and will be less dramatic than recent black-market rates suggested. The country’s notes had the largest gains among emerging-market and frontier debt worldwide on Monday.

The pound gained

On the parallel market، the pound has gained around 20% to about 50 per dollar، according to multiple traders and importers Bloomberg spoke with. That’s narrowed the gap but is still considerably weaker than the official one، which has held steady at about 30.9 per dollar for the past year as Egypt wrestles with a dire shortage of foreign currency.

The worst crisis in decades appeared to reach a turning point last week، when authorities signed a massive pact for the UAE to develop Ras El-Hekma، a prime area on Egypt’s Mediterranean coast. The government described it as the biggest investment in the country’s history.

The potential infusion of funds would give Egypt’s central bank the financial fire-power it needs to enact what would be its fourth devaluation since early 2022. 

That move in turn would help Egypt seal a deal to increase its current $3 billion loan with the International Monetary Fund — little of which has been distributed — to a package of more than $10 billion that may bring in other partners.

While some of the UAE funds are expected in the coming weeks، not all of the monarchy’s previous investment pledges are proceeding according to plan. 

Turkey، for instance، has put an $8.5 billion sukuk deal with the UAE on hold to explore cheaper options in the global bond markets، with Ankara viewing the yields demanded as unfavorable.

Trimming risk perception

Egypt’s currency move is widely expected in the first quarter of 2024، although analysts have been split on its magnitude and whether it would breach 50 per dollar. On the non-deliverable forwards market، the Egyptian pound’s 12-month contract has strengthened more than 17% since the Ras El-Hekma deal was announced، signaling expectations of a smaller devaluation.

The pact has also trimmed investors’ risk perception for Egypt. The extra yield investors demand to own the country’s sovereign dollar bonds rather than US Treasuries narrowed 65 basis points to 672، according to indicative intraday data from JPMorgan Chase & Co. The bonds were trading at a distressed level of more than 1،000 basis points above Treasuries as recently as January.

Along with the obvious influx of badly-needed foreign exchange، the Ras El-Hekma pact represents “even larger gains when it comes to the country’s credit metrics،” said Mohamed Abu Basha، head of research at Cairo-based investment bank EFG Hermes. Thanks to a debt swap involving the $11 billion from the UAE held in Egypt’s central bank، the country will trim 7% of its external liabilities.

An additional $24 billion of debt-free financing is also “major positive news for the fiscal position،” according to Abu Basha. Much of that sum، if delivered، would allow Egypt to finance as much as a third of its budget deficit with no cost، he said.

That should help the government reduce its gross financing needs، lower its sizable interest payments and cut domestic debt levels، representing “a major win on the fiscal side،” Abu Basha said.