Bloomberg: Traders Looking for Refuge From Volatility Will Find It in Egypt

SEE – August 16th: Egypt has transformed into a haven for debt investors from a crisis zone in less than two year, Bloomberg said in a report published today.

The Egyptian pound has been relatively immune to a rout that sent Turkish and Argentine currencies reeling to record lows. The pound also held its own even as Egyptian Treasury bills suffered outflows of at least $4 billion since March.

Tough measures to stabilize the economy are paying off for the debt market, prompting S&P Global Ratings to raise the nation’s credit rating in May. And while a recent sell-off in the country’s debt may have irked some investors, others, including TCW Group Inc. and Union Investment Privatfonds GmbH., find the currency’s stability and its relatively high yields attractive.

Despite the outflows, “we are encouraged that there were no reports of dollar shortages,” said Brett Rowley, the Los Angeles-based managing director for emerging markets at TCW.

Egyptian Treasury bills offer an average yield of almost 19 percent, pretax, compared with about 5 percent for local-currency emerging-market debt

While Argentina and Turkey offer higher yields for their five-year debt, the currency gyrations make them less appealing than Egypt’s, Rowley said

The pound’s 30-day historical volatility has fallen to below 2 percent, after climbing to a recent high of 3.4 percent in June

In comparison, the lira’s one-month historical volatility was more than 70 percent, while Argentina’s peso was near 20 percent

Foreign investors pared their holdings of Egypt’s Treasury bills to $17.5 billion in July, from $21.6 billion in March, according to latest available data

The nation allowed the pound to trade freely in November 2016 as part of an International Monetary Fund deal for a $12 billion loan to support its recovery and end the hard-currency crunch.

While the pound lost half its value after the float, a central-bank mechanism that guarantees investors’ ability to take money out of the country has limited the currency’s fluctuations, the IMF said in an email response to questions. That’s because when investors bring in hard currency, the central bank keeps the money in a special account, and then sells the cash back to foreigners on their way out.

Strong growth in inflows from tourism and remittances have also helped offset fund outflows in recent months, according to the Washington-based lender. The central bank is expected to hold it’s main interest rate at 16.75 percent on Thursday.

The central bank raised the cost of using the mechanism last year, pushing more investors to exit using the open market and boosting demand for dollars. But a solid supply of hard currency in the inter-bank market helped keep the pound stable over the past few months as investors sought to exit, according to three people familiar with the matter.

"The repatriation mechanism still shields the pound from sharp fluctuations, even though raising its cost is the reason why the pound has started witnessing more volatility,” said Mohamed Abu Basha, director of macro analysis at investment bank EFG-Hermes in Cairo.

The currency’s 10-day volatility in May spiked to the highest since July 2017 as the pound depreciated 1.3 percent, the most on a monthly basis in more than a year. It has since eased, with monthly moves of 0.3 percent or less.