Default jitters stalk Egypt, sending traders on a wild ride
An already turbulent year for emerging-market traders is getting another shot of adrenaline as Egypt fights to avert a debt crisis.
The north African country has become the latest symbol of the distress gripping poorer countries on the back of surging inflation, rising yields and a grinding down of global growth.
Investors, still smarting from recent defaults by Russia and Sri Lanka, are watching Egypt as a case study to gauge whether – and how quickly – the broader developing world can sidestep a full-blown debt crisis and navigate the coming era of tighter credit conditions.
The turmoil is all too visible in Egypt’s assets. The probability its government will fail to repay debt in the one year has surged to the highest since 2013, and to the region’s worst, based on a Bloomberg model.
That sent the extra yield investors demand to buy Egyptian bonds rather than Treasuries above 1,200 basis points for the first time ever, before facing the sharpest drop in more than two decades, according to JPMorgan Chase & Co data. The pound slumped to the weakest since the 2016 surprise devaluation.
It’s hard to ignore some signs of stability which emerged for the country this month, with a new central-bank chief seen as a watershed reason for optimism alongside ongoing talks with the International Monetary Fund.
Still, concerns that the Arab world’s most populous nation will fail to honour its debt will remain front of mind for investors until there’s clarity that Egypt will devalue its currency and an IMF package will be large enough to close its funding gap.
“To stave off a debt default, Egypt will require additional external support, especially within the context of a bulging current account deficit and weak capital inflows,” said Callee Davis, an economist at Oxford Economics Africa.
“If Egypt is unable to secure further external financing, the risk of a debt default will increase substantially.”
It’s been a wild ride for investors, as seen in the cost to insure the country’s bonds. The gauge remains elevated – hitting a record high 1,500 basis points last month, before moderating to around 940 basis points for the week ended on 26 August, still higher than troublesome Turkey and Angola.
The pain being felt by heavily-indebted countries – like Egypt, whose ratio of debt to gross domestic product stands at about 94% – cannot be ignored. Egypt has more than $5 billion of dollar- and euro-denominated bonds.
