EFG Hermes has ruled out any significant decline in foreign investors’ appetite for Egyptian treasury bonds (T-bonds) if the Central Bank of Egypt (CBE) continues its policy of cutting interest rates.
EFG Hermes Managing Director and Head of Research Ahmed Shams El Din announced that the total sales of Egyptian treasury bills (T-bills) to foreigners are expected to reach about $19bn, similar to 2017, according to the state-run Middle East News Agency.
The government’s foreign exchange needs that would be provided through treasury bills may range from $15bn to $20bn in 2018, much of which will be used to pay previous benefits, Shams El Din explained, adding that T-bill sales to foreigners would be sufficient to cover those foreign exchange needs. However, Shams El Din clarified that the excessive reliance on the deluge of foreign inflows into Egypt’s high-yielding debt is undesirable and carries serious risks.
“If interest rates declined to 13-14%, yields will consequently be lowered on Egyptian treasury bills to levels close to those rates. However, this would not affect the attractiveness of Egyptian treasury bills to foreigners, as they are low-risk investments,” he explained.
He pointed out that the average yield dropped to 170 basis points from about 320 after the liberalisation of the exchange rate, pointing out that when comparing the return on Egyptian debt instruments—even after the interest rate cuts—it remains one of the highest returns in emerging markets.
If debt instruments (bonds and treasury bills) are higher in some countries such as Argentina, Nigeri,a or elsewhere, this does not mean that foreign investors and global investment funds will put all their money in these countries, but they will distribute it based on risk, Shams El Din added.
The CBE cut rates at its last meeting on 16 February by 1%, while further decisions by its Monetary Policy Committee (MPC) on interest rates are anticipated during its next meeting on Thursday.
The MPC decided to lower the overnight deposit rate, the overnight lending rate, and the rate of the CBE’s main operation by 100 basis points to 17.75%, 18.75%, and 18.25% respectively. The discount rate was also reduced by 100 basis points to 18.25%.