Surge in foreign fund inflows sets stage for Egyptian boom

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Encouraged by Egypt’s economic reforms, a major gas find, streamlined business rules and a devalued currency, investors are increasingly optimistic about prospects for the North African country after years of political turmoil.

Foreign holdings of Treasury bills hit a record high in December, foreign inflows into the stock market last year were the highest since 2010 and direct investment by foreign firms and private equity funds is on the rise again.

Key for many longer-term foreign investors are the natural gasfields that have come on stream in the last few months, including the offshore Zohr field, whose estimated 30 trillion cubic feet makes it the largest in the Mediterranean.

Iyad Malas, a Dubai-based partner of private equity firm Gateway Partners, said Zohr “will be a game changer for Egypt” and the company’s fund, which invests in Asia, the Middle East and Africa, is looking at several opportunities in Egypt.

The gas discoveries should eventually make Egypt a gas exporter and boost its plans to become a regional energy hub.

Besides the gas, private equity firms say reforms launched since the end of 2016 that secured a $12 billion loan program from the International Monetary Fund (IMF) have shifted sentiment enough to spur investment, despite the risks.

One of Egyptian President Abdel Fattah al-Sisi’s biggest challenges is to end an Islamist insurgency which has started to shift its attacks from the remote Sinai peninsula to larger cities.

Investors, however, say they are more concerned the government might deviate from reforms agreed with the IMF, such as cutting energy subsidies further, to keep voters on side ahead of presidential elections this year.

Investors also want inflation to fall and for the government to press ahead with reforms to tackle the red tape that has left Egypt ranked 128 out of 190 countries in the World Bank’s ease of doing business index.

Since November 2016, Egypt has devalued its currency, removed limits on foreign currency transfers, lifted hard currency restrictions for importers, cut subsidies for domestic fuel and raised value-added tax.

“We’re very positive on Egypt,” said Karim El Solh, co-founder and chief executive of Abu Dhabi’s Gulf Capital, which has invested some $200 million in Egypt.

“In the region, it is set to be the economic outperformer in 2018, especially after these very strong and needed structural reforms,” he said.

Investment by overseas investors in short-term, liquid instruments such as Treasury bills has been heavy since Egypt devalued its currency and raised interest rates.

Throughout 2017, investors snapped up bills with maturities of three to 12 months yielding as much as 22 percent. By early December, foreign holdings of Treasury bills had hit a record 338 billion Egyptian pounds ($19 billion), up from 532 million pounds in mid-2016, central bank data showed.

In U.S. dollar terms, foreign holdings of Treasury bills are now nearly three times the previous high in 2010 - with about half the investment coming in the last few months of 2017.

Charles Robertson, global chief economist at Renaissance Capital, estimates the Egyptian pound EGP= is 16 percent undervalued compared to its long-term average and with inflation EGCPY=ECI coming down from its 2017 peak of 33 percent, Egypt remains one of the most attractive emerging markets.

The stock market, which has a capitalization of $45 billion, has also benefited from net inflows of foreign funds, which came to 7.5 billion pounds in 2017, the highest since a record 8.4 billion pounds in 2010, according to exchange data.

Since the pound floated on Nov. 3, 2016 - slumping from 8.8 to the dollar to 17.7 now - the Egyptian blue-chip index .EGX30 has climbed more than 70 percent.

Robertson expects the rally to continue for the next two years now the shock of the 2016 currency devaluation has passed, economic growth is picking up and high inflation is receding.