Investors Flee Egypt’s Treasury Markets as Russia-Ukraine War Deepens

Investors have fled emerging markets for safer pastures since the Russian invasion of Ukraine last week, causing hundreds of millions of dollars to depart Egypt’s treasury markets, a report said.

Two bankers quoted in the report said Egypt had actually been working towards maintaining interest in its treasury bills before the crisis to plug its current account deficit and fend off pressure to let its currency weaken ahead of possible U.S. Federal Reserve rate hikes.

A moderate sell-off of Egyptian bonds began on Thursday and gained momentum on Monday. Some hundred million dollars were flown out of the secondary market on Monday and rates on treasury bills denominated in Egyptian pounds jumped 30-40% on average.

According to another estimate, foreign investors have pulled out $3 billion since Thursday as a result of higher yields, increased activity on the interbank currency markets and information gathered from other banks.

Tuesday and Wednesday were relatively quiet days for the market following this initial surge.

There has yet to be any comment from the Egyptian central bank regarding the exodus of dollars. But many investors believe that emerging markets are more susceptible to any shockwaves caused by the disruption of trade with Russia, including the increased price of some commodities.

Furthermore, Egypt’s economic headache is compounded by the Ukrainian crisis, which has the potential to drive up the price of imported wheat.

Trader data show that Egypt imported wheat from Russia and Ukraine around 80% of the time in 2021. As a result of the crisis, the state grain buyer has cancelled a second international wheat tender in four days.

The Egyptian central bank has maintained its overnight interest rates unchanged since November 2020, and the Egyptian pound has remained virtually constant at around 15.70 against the dollar, helping burnish the picture of strength burnished by the economy remaining in growth during the COVID-19 pandemic.

The Central Bank of Egypt reports that foreigners had held 321.8 billion Egyptian pounds ($20.55 billion) in treasury bills with a one-year maturity and an undisclosed amount in longer maturities as of the end of December.

Yvonne Mhango, an economist at Renaissance Capital, told journalists on a conference call that portfolio investor inflows were going into the local currency market and funding the current account deficit.

According to official data, Egypt’s current account deficit rose from $2.8 billion a year earlier to $4 billion in the July-September quarter, fueled by an increase in imports.

“So, as you can imagine, one risk or concern is what happens if those flows do slow down,” Mhango said in comments made before the Russian invasion of Ukraine.


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