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IMF deal to keep carry party going for emerging-market darling

[DUBAI] Egypt is the world's best carry trade. It may stay that way for a while longer if the government gets its wish and strikes another deal with the International Monetary Fund.

The Arab nation's local-currency bonds have handed investors a 23 per cent return this year, five times the emerging-market average. And the Egyptian pound's 7.3 per cent gain against the dollar is the most globally after Russia's ruble.

Demand has been strong in large part because of a three-year IMF loan deal worth US$12 billion that expires later in 2019. President Abdel-Fattah El-Sisi's administration wants to replace it with a non-financial agreement so that the IMF continues supporting structural reforms.

That could help sustain portfolio flows to a country that already has the advantage of being unscathed by the US-China trade war relative to most other emerging markets, according to Cairo-based investment bank EFG-Hermes.

"Egypt makes for a very good trade," said Mohamed Abu Basha, EFG's head of macroeconomic analysis. "I don't think many investors were very worried about the government backtracking on reforms, but signing the deal would act as further reassurance and can guarantee a consistent stream of inflows and lower borrowing costs."

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The average yield on Egypt's local debt has fallen 214 basis points to a one-year low of 16.4 per cent since the end of 2018, according to Bloomberg Barclays indexes. It remains about the highest among major emerging nations, behind only Argentina and Turkey.

Gains in the Egyptian currency have come despite the central bank's surprise rate cut in February, though a dovish tilt from US and European monetary officials helped.

Citigroup Inc and Societe General SA have recommended that fixed-income clients stick with the Egyptian trade, citing real yields of roughly 5 per cent and the pound's resilience. Carry traders who borrowed dollars to invest in Egyptian local debt would have made returns of 15 per cent so far this year.

Marie Salem of FFA Private Bank said Egypt may get another boost if US President Donald Trump's plan to attract US$50 billion of investment for the Palestinian territories and its neighbours succeeds. Egypt is meant to receive US$9.1 billion under the initiative, though Palestinian leaders have rejected it and El-Sisi's government only sent a deputy finance minister to its launch in Bahrain this week.

"With all the enhancement and support that Egypt is getting from the IMF and the US, and the efforts of the regulators, the pound has maintained its stability for the past year and we expect it to strengthen," said Salem, Dubai-based director of capital markets at FFA.


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