Fund man­agers see un­cer­tainty over econ­omy

Kuwait Times - - BUSINESS -

LON­DON: Egypt’s cur­rency de­val­u­a­tion may even­tu­ally bring for­eign money into the coun­try, but fund man­agers say un­cer­tainty about the econ­omy means there will be no quick in­flows of port­fo­lio in­vest­ment from abroad.

To en­sure its cur­rency sta­bi­lizes af­ter last week’s de­val­u­a­tion, Egypt needs a surge of hard cur­rency re­ceipts to cover a cur­rent ac­count deficit that to­talled $18.7 bil­lion in the year to last June.

For­eign di­rect in­vest­ment, at $6.8 bil­lion, is ex­pected to change only slowly be­cause com­pa­nies’ de­ci­sions are com­plex. Egypt’s econ­omy is so im­port-de­pen­dent that an ex­port boom looks un­likely any time soon. A cheaper Egyp­tian pound may en­cour­age more Egyp­tians work­ing over­seas to send money home, but re­mit­tances - which to­talled $17.1 bil­lion - have changed lit­tle over the years.

That leaves for­eign port­fo­lio in­vest­ment as one of the best po­ten­tial sources of new money. Be­fore po­lit­i­cal up­heaval in 2011 led to years of eco­nomic in­sta­bil­ity, Egypt at­tracted bil­lions of dol­lars of such in­vest­ment an­nu­ally; last fis­cal year, there was a net out­flow of $1.3 bil­lion. But many for­eign fund man­agers said that while the cur­rency shift was pos­i­tive be­cause it largely re­moved a mas­sive over­val­u­a­tion of the pound, other types of risk would con­tinue de­ter­ring in­vest­ment. Al­though for­eign funds pur­chased Egypt’s dol­lar bonds at the end of last week, there was lit­tle sign of for­eign buy­ing of lo­cal cur­rency as­sets.

For that to hap­pen, sev­eral man­agers said, Cairo will have to show it can repli­cate the suc­cess of other coun­tries in In­ter­na­tional Mon­e­tary Fund lend­ing pro­grams, such as Pak­istan - a process that could take money months. The de­val­u­a­tion “def­i­nitely makes it more at­trac­tive as the pound is now no longer such a risk,” said Al­lianz Global In­vestors port­fo­lio man­ager Shahzad Hasan.

“But at this level the good news is priced in on the (dol­lar) bonds. Now the fo­cus switches to the im­ple­men­ta­tion of the IMF pro­gram, which is more dif­fi­cult.”


The de­val­u­a­tion took the pound from 8.8 against the dol­lar to around 15.35-15.75. Many for­eign in­vestors will be un­will­ing to put money in lo­cal cur­rency as­sets un­til they think the pound has found a floor, and that point may be dis­tant. Non-de­liv­er­able for­ward con­tracts price the pound at 17 per dol­lar in 12 months. That is partly be­cause of a back­log of de­mand for dol­lars. An­a­lysts at Citi es­ti­mate this at $9-11 bil­lion, and say it must be cleared be­fore the pound stead­ies.

An­other risk is in­fla­tion. Al­though imports of most goods were al­ready be­ing paid for at the black mar­ket ex­change rate, the de­val­u­a­tion will raise prices for im­ported fuel and pos­si­bly es­sen­tial foods. Citi es­ti­mates this will add 3 per­cent­age points to its pro­jected year-end in­fla­tion rate of 14 per­cent in­fla­tion, and a fur­ther 1 or 2 points early next year. Citi said that while Egyp­tian Trea­sury bills with yields around 22 per­cent looked “op­ti­cally in­ter­est­ing”, in­ter­est rate in­creases of an­other 2 or 3 per­cent­age points could be needed to sta­bi­lize in­fla­tion.

An­other prob­lem is the stock mar­ket, with a cap­i­tal­iza­tion of un­der $30 bil­lion, has be­come too small to ab­sorb much new money. The mar­ket in lo­cal cur­rency gov­ern­ment bonds and T-bills, which to­tals about 1.40 tril­lion pounds, is much big­ger.

For­eign par­tic­i­pa­tion in lo­cal bonds is vir­tu­ally nil but a few years ago it was as much as $10 bil­lion, said Re­nais­sance Cap­i­tal, which ex­pects for­eign­ers to re­turn over the next six to 12 months.

But there are lo­gis­ti­cal dif­fi­cul­ties. “From a prac­ti­cal per­spec­tive, it’s still dif­fi­cult to de­ploy cap­i­tal into Egypt,” said Kieran Cur­tis, port­fo­lio man­ager at Stan­dard Life In­vest­ments. Cus­to­dian banks are cau­tious in of­fer­ing ser­vices, be­cause the Cairo bourse closed dur­ing po­lit­i­cal un­rest, he noted. “We have been in­volved in the hard cur­rency bonds, and at some point we will look at the T-bills.” — Reuters


Egyp­tian traders work on the floor of the stock mar­ket in Cairo, Egypt. The Egyp­tian pound is trad­ing in banks at around 16 to the dol­lar, down from the 13-pound peg the Cen­tral Bank set as a guid­ing ex­change rate when it floated the cur­rency last week.

— AP

CAIRO: A woman shops at a su­per­mar­ket in Cairo, Egypt. The Egyp­tian pound is trad­ing in banks at around 16 to the dol­lar, down from the 13-pound peg the Cen­tral Bank set as a guid­ing ex­change rate when it floated the cur­rency last week.

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