Has Egypt turned the corner? An IMF deal and brisk bond sales would seem to suggest so

Zawya

05-02-2025

The battered Egyptian economy (Caa1 [positive] by Moody's; B- by S&P [positive], B [stable] by Fitch) looks set to bounce back this year after a series of positive events--both external and internal--unfolded in recent months. This was well evidenced last week in the global debt markets when $2 billion of sovereign bonds were snapped up by investors at very favourable pricing for the government.
International investors seemed to have taken note of the fact that Egypt has taken steps to improve its macroeconomic stability, including maintaining a flexible exchange rate for the pound. The IMF agreed to unlock about $1.2 billion in funds after Cairo agreed to speed up tax reforms, accelerate privatisation of state-owned companies, build fiscal buffers to reduce debt vulnerabilities, and undertake other such measures needed to reset the economy. The bank has estimated that Egypt's economy will grow by 3.6% in 2025, up from 2.4% in 2024. Foreign reserves have surged to an all-time high of $47 billion, and foreign portfolio investors have returned.
'Our view is that Egypt is an improving credit story, and that's reflected in the fact that it has regained eurobond conventional market access for the first time in four years and was able to print in size at $2 billion. We are also seeing the improving fundamentals reflected in the credit rating upgrades and the positive outlooks by the rating agencies, so we do feel that Egypt has turned the corner,' said Fady Gendy, Fixed Income Portfolio Manager, at the Dubai-based Arqaam Capital.
The bond sale was in two tranches: $.25 billion in five-year and $750 million in eight-year bonds, with yields at 8.625% and 9.45%, respectively, which came in tighter than the initial price guidance. The sales were conducted under the country's global medium-term note programme, which aims to raise $40 billion, the proceeds which will be used, among other things, to finance a portion of the fiscal deficit, according to a base offering circular published on the London Stock Exchange.
New confidence
'From the perspective of the government, the issuance was a success. It was well telegraphed, so investors were prepared for the issuance, and that allowed the government to do a drive-by issuance, which is very rare for an Emerging Markets (EM) single B rated issuer, and that confidence was also reflected in the tight pricing, especially on the eight-year bond,' said Gendy.
A Dubai-based banker said that investors tend to view Egypt as an extension of the GCC, particularly after the $35 billion investment by the UAE's sovereign wealth fund, ADQ, to acquire the rights to develop the Ras El-Hekma project on the Mediterranean coast. Moreover, the scarcity value of the recent issuance, with Egypt having hit the global market after a four-year hiatus, also led to it being multiple times oversubscribed, he added.
The yield curve for Egypt bonds still offers some value versus peers, especially the long end, which is yielding about 11.0% despite being flattened recently.
'At the very short end, the bonds that are of 3-to-5-year maturity have definitely tightened in yield, but that's a function of the very strong local bid for the front end of the curve. International demand is typically more geared towards the belly and the long end of the curve.'
The government aims to raise $3 billion in global debt by the end of the current fiscal year that ends in June 2025. It is due to repay €750 million in April, followed by $1.5 billion in June and $750 million green bonds in October, according to a Reuters report that cited the Egyptian finance ministry.
'We expect that before the end of the current fiscal year, that is by June-end, Egypt will return to the eurobond market with a dollar-denominated sukuk sized between $1 and 1.5 billion, which, when you add to the $2 billion last week, means Egypt has officially returned with $3 to $3.5 billion. This is in line with what the Finance Ministry is guiding for, that the total eurobond issuance will be in the range of $3 to $4 billion in any given fiscal year, and not more, as it wouldn't want to flood the market,' said Gendy.
Egypt's debt-to GDP ratio has fallen by 7% in FY 2023-24 and while it is still at elevated level of 89%, the government is committed to reduce it to below 80%, as part of the IMF loan agreement. The bank expects the budget deficit to remain high at over 10% of GDP in 2025, mainly due to high debt service costs.
Meanwhile, country received the first tranche of the European Union's 7.4 billion euros ($8 billion) financing package, amounting to €1 billion early in January and is in talks to secure approval for a second tranche valued at €4 billion, according to the Egyptian media.
Moving along the yield curve
Foreign investors are now the majority holders of Egypt's local debt. Following the UAE's investment in Ras El-Hekma and the devaluation of the pound last March, there was a large inflow of foreign portfolio investors into treasury bills, highly liquid short-term instruments giving double digit yields of between 20% to 30%. January's bond issuance is expected to extend maturities.
'Investors are now extending along the domestic curve and buying the two-year and three-year bonds to lock-in yield in advance of what we expect to be a very aggressive rate cutting cycle by the central bank in Egypt as inflation comes down,' Fady said.
Goldman Sachs which expects to see deep rate cuts during the year, maintained its forecast of interest rates dropping to 13% from the current levels of 27-28% by the end of the year. Farouk Soussa, Goldman's MENA economist said in a note this could lead to 'greater issuance across the curve, including in long-dated Treasury bonds'
Apart from the IMF deal, the spectrum of good news for Egypt includes the ceasefire in the Hamas- Israel conflict that could cool down the tensions in the region. The Houthi rebels in Yemen have said they will allow maritime traffic to resume through the Red Sea, a development that will benefit Suez Canal, which has seen revenues drop more than 60% resulting in a loss of $7 billion from 2023. The resumption of Suez Canal traffic could add up to $5 billion to the current account, according to Egypt-based CI Capital.
With so many moving parts in play, Egypt must remain committed to the structural reform agenda, including the drive to privatize state-owned companies if only to ensure international lenders and its GCC neighbours continue to provide the critical financial support.
As James Swanston, MENA economist at Capital Economics said in a recent note: '…if investors perceive that Egypt's progress on reforms is stalling, they could seek to pull their investments out'.
(Reporting by Brinda Darasha; editing by Seban Scaria)