Foreign portfolio investors return as Egypt's financial health improves

Zawya

4 days ago

Despite receiving a reprimand from the IMF over delays in its privatisation programme, Egypt continues to draw strong interest from foreign portfolio investors. This is reflected in the $15 billion of inflows into local debt markets—particularly EGP-denominated treasury bills and bonds—since the flotation of the Egyptian pound in March 2024. These instruments offer high yields and are relatively insulated from foreign exchange risk.
Investor sentiment toward Egypt has remained broadly positive in recent months, supported by a stronger foreign reserves position, the UAE's $35 billion investment in Ras El-Hekma, and progress on the IMF-backed reforms.
Within the broader emerging markets (EM) allocation context, Egypt stands out as a relatively favourable trade. This is partly due to domestic developments but also reflects global macro trends. Two key shifts have worked in Egypt's favour since the onset of tariff tensions earlier this year:
-A weaker US dollar, which typically boosts capital flows into EMs.
-Lower oil prices, which benefit Egypt as a net energy importer.
'We maintain a positive fundamental credit view on Egypt,' said Fady Gendy, Portfolio Manager at Arqaam Capital. 'The country enjoys strong backing from bilateral partners, and there are potential new deals in the pipeline. For instance, Qatar and Kuwait may convert their central bank deposits into direct investments, alongside fresh inflows.'
Investor confidence has also been buoyed by the IMF's fifth and sixth combined review of Egypt's support programme, as well as support from the EU and World Bank. However, the pace of privatisation of state assets remains a key concern, as it is central to the IMF program and critical for fiscal consolidation.
On the hard currency side, Egypt's eurobonds have rallied significantly since the April 2 sell-off—triggered by US tariff reforms and the brief Israel-Iran conflict.
'Following the rally, yields have dropped, and Egypt now appears expensive—both historically and relative to similarly rated EM peers like Bahrain, Jordan, and some African sovereigns. We're waiting for more attractive entry points,' Gendy added.
Dual strategy
Meanwhile, foreign investors remain active in the local currency market, particularly in short-term EGP-denominated instruments, which offer net yields above 20%. These instruments are attractive due to their short duration and limited interest rate sensitivity.
'We view these as high-yielding, short-term carry trades. Entering now—before the Central Bank of Egypt (CBE) resumes its rate-cutting cycle—offers the potential to lock in gains, especially by extending into longer-dated bonds,' Gendy said.
The CBE, which cut overnight interest rates in April and May for the first time in over five years, has since paused. However, markets anticipate up to 300 basis points (bps) of rate cuts in the second half of the year.
As a result, foreign investors are pursuing a dual strategy: investing in short-term treasury bills (3, 6, and 12 months) to capture current high yields of 20–22%, while also positioning in 3- and 5-year bonds to benefit from potential price appreciation as rates decline.
Mohamed Abu Basha, Head of Macroeconomic Analysis, at EFG Hermes, noted that while there were significant outflows during the Israel-Iran tensions, these have been fully reversed and that market has actually seen net inflows since the ceasefire was reached.
'With the Finance Ministry increasing its issuances, and the CBE slowing its pace of easing, yields have edged up slightly—by 40bps on average for short-end of the curve and 14bps for the longer end. When foreign participation in auctions dips, local investors typically tend to push for higher returns,' Abu Basha told Zawya.
Foreign investors currently hold an estimated 25–30% of Egypt's local currency debt, according to Abu Basha.
Looking ahead, tangible progress on privatization will be crucial—especially as Egypt aims to become a regular issuer in international markets, targeting $3–4 billion in annual issuance.
'While the lack of progress may not immediately impact the debt market, it's a key risk we're monitoring. Delays in asset sales could trigger a domino effect,' Gendy warned.
'Foreign investors have continued to add to their positions, and the EGP has appreciated. That seems to reflect confidence in Egypt's reserve position, especially after last year's Ras El Hekma deal as well as more recent improvement in the current account balance,' Basha said.
Egypt plans to raise EGP 3.2 trillion ($65 billion) in the domestic debt market in FY 2025/26, up from EGP 2.7 trillion in the previous fiscal year, as the government seeks to refinance maturing debt and plug its fiscal deficit.
(Reporting by Brinda Darasha; editing by Seban Scaria)