While the market is growing alarm that Egypt could soon cave in to pressure with one of its steepest currency depreciations yet, it has sent investors seeking cover.
Derivatives used to hedge risks or speculation signaled the approach of Egypt's fourth devaluation since March 2022, belying calm in the spot market, where the pound traded little changed.
Non-deliverable forward contracts on the currency posted their biggest drop since the last devaluation in January, with the 12-month tenor weakening 4.5% to 42.8 per US dollar on Thursday. The moves reflect speculation by some market participants that authorities will allow for a steep drop in the pound at the end of the Muslim holy month of Ramadan, which ends around the second half of next week, according to Societe Generale SA spokesman Gergely Urmossy.
There is consensus among market players - including myself - that the Egyptian pound will be devalued, Urmossy, an emerging-markets strategist in London, said on condition of anonymity. The longer authorities wait with devaluation, the more significant the magnitude could be. In other vulnerable areas of the market, Egypt's debt spiraling deeper into distress territory, with anxiety and impatience playing out.
The extra yield investors demand to buy Egyptian dollar bonds instead of Treasuries was 1,199 basis points on Thursday, just 54 basis points shy of the record high reached in July.
The government has $74 billion in Eurobond principal and interest payments coming through 2061, according to Bloomberg data.
Egypt is becoming a frustration story for many, said Nafez Zouk, an EM sovereign debt analyst at Aviva Investors in London. It's embarrassing to see how quickly the work has been progressing. The most populous nation in the Arab world will not honor its debt until investors understand that Egypt will devalue its currency and get the investment flows it needs to close its funding gap.
The pound has weakened about 50% over the past year, but remains far stronger than rates quoted in the black market. The divergence raises the risk of further depreciation as the nation grapples with a foreign-exchange crunch.
The government vowed in October to shift to a more flexible exchange rate, enabling it to secure a $3 billion contract with the International Monetary Fund. The currency's declines continued to be followed by long-term stability, though, following the currency's depreciation.
We have been expecting a devaluation for some time now, and it is not materializing, said Zeina Rizk, executive director of fixed income at Arqaam Capital in Dubai. There is a loss of credibility at this point, and I don t think a devaluation is enough for inflows to return. Nobody a runner's murder in Kenya opens a window into violence aimed at women.