Hot money inflows boost Egyptian pound against the dollar

The Egyptian pound has appreciated against the United States dollar over recent days, reaching its highest exchange value since the beginning of the year at LE48.7 on Tuesday, according to the Central Bank of Egypt.

Two informed sources told Mada Masr that the rebound was driven by a renewed influx of foreign investment in government debt instruments such as treasury bills and bonds.

The pound has appreciated by 2.5 percent in July, retreating from a June peak at over LE50.  

In parallel, foreign inflows to government debt instruments reached between US$1 billion and $1.2 billion over the past three weeks, according to financial analyst Saad Ali of an investment firm, as well as estimates from an informed government source and a second financial analyst, both of whom spoke on condition of anonymity.

Foreign holdings in debt instruments totaled $46 billion in mid-June, according to data reviewed by Ali and the government source.

All three sources noted that hot money inflows significantly rebounded after an investor exit from the market during the exchange of fire between Israel and Iran in June. Levels now exceed those recorded just before the outbreak of the 12-day war, they said.

Investor appetite for government debt is being driven by two main factors. The first is high returns, with six-month treasury bills offering yields of up to 27.7 percent at the start of this week.

Investors are confident that yields will remain high as the central bank is not expected to cut interest rates rapidly, as inflation picks back up fueled by rising energy and transportation costs, according to Ali and the other financial analyst.

Additional price hikes are also expected as the government proceeds with its fuel subsidy reform plan, part of its agreement with the International Monetary Fund — a step that could extend the current inflationary trend.

Inflation has picked up markedly over the past four months, following a four-month slowdown. May stood out in particular, with rates registering the sharpest monthly increase in eight months, largely driven by rising energy prices, before somewhat slowing in June.

Also stimulating foreign investment in Egypt is the global decline of the US dollar, which has fallen to its lowest level since the 1970s against major currencies, and is expected to continue the decline. 

In just the first half of this year, the dollar dropped by around 11 percent, according to the DXY Index. This decline has been driven by the policies of US President Donald Trump, which have raised concerns over the independence of the Federal Reserve and pushed for steep interest rate cuts, prompting investors to shift toward emerging markets or gold, Ali and the financial analyst said.

The financial analyst stressed that the pound’s appreciation does not necessarily reflect an improvement in Egypt’s economic performance. The balance of payments continues to suffer a significant deficit, amounting to $40 billion, as does the gap between Egypt’s dollar-denominated obligations and its foreign currency revenues.

In fact, both analysts agreed that the renewed hot money inflows will once again leave the economy fragile. "Hot money is a ticking time bomb," the financial analyst said.

Egypt was thrown into economic turmoil in the first quarter of 2022 following the outbreak of the Russia-Ukraine war, when investors withdrew around $22 billion from its sovereign debt market over the first months of the year, triggering a two-year liquidity crisis.

During that period, the exchange rate surged from around LE15 to LE50 to the dollar, with the central bank implementing four successive devaluations and ushering in a wave of rapid inflation.

Former Finance Minister Mohamed Maiet acknowledged the mistake of repeatedly relying on hot money at the time, staking out a direction to reduce the state’s dependence on the debt market as a liquidity source — a shift that has yet to materialize.