Hot money inflows rise to USD 38 bn amid declining inflation, anticipated rate cuts

Foreign investors have significantly increased their purchases of government debt instruments, leading to a resurgence in hot money inflows following a slight blip at the beginning of the month that was driven by the maturity of one-year t-bills. Foreign holdings of public debt have returned to their pre-December levels, reaching approximately USD 38 bn, a senior government official told EnterpriseAM.

Last week in particular was a busy one for the debt market as foreign investors bought over USD 2 bn in government debt instruments, our source tells us. The Finance Ministry issued debt instruments worth EGP 205 bn on Thursday and Sunday of last week to cover maturing debt obligations, with the issuances receiving strong demand from foreign investors, according to data from the Central Bank of Egypt’s website.

Why now? The source attributed the rise in demand from foreign investors to declininginflation figures coupled with expectations of an interest rate cut from the CBE in April — both of which are driving investors to buy one-year and nine-month debt instruments. Demand has also increased for t-bills with a 91-day maturity amid geopolitical tensions, the source added.

Rising demand brought down the yield on debt instruments, with the average yield on government debt instruments declining by around 2-3 percentage points, the source said. Demand was highest for 91-day and 182-day treasury bill auctions, with the two auctions receiving offers totaling EGP 533 bn for a targeted amount of just EGP 110 bn. This reduced the yield to 27-28%, compared to a previous average range of 27-31%.

The new issuances are intended to finance maturing debt, with a smaller portion allocated to bridging the fiscal deficit — which explains why the Finance Ministry is accepting high yields, our source told us. The ministry has increased its loan requests from local banks to approximately EGP 1.8 tn during the current quarter of the fiscal year to meet debt obligations. Inflows from foreign investors are expected to continue in the near term to help offset losses in the equity market, our source added.

More debt issuances are on their way, our source told us, explaining that the ministry is currently expanding the issuance of various debt instruments to reduce the cost of public debt servicing and that preparatory steps are underway to issue sukuk in the domestic market, though no specific timeline has been set yet. The ministry is also looking to issue treasury bonds with variable interest rates, as well as zero-interest loans and traditional debt instruments.

The current wave of investment in treasuries reflects strong demand from foreign investors as the quarter nears its end, banking expert Mohamed Abdel Aal told EnterpriseAM. Investors are seeking to lock in high interest rates for as long as possible, which has helped stabilize FX liquidity in the interbank market and kept the exchange rate steady despite geopolitical tensions and economic upheaval, Abdel Aal said.

Abdel Aal projected that the exchange rate would stabilize around EGP 50.75 due to the inflows, which have helped strengthen the EGP at this time — indicating that foreign investment inflows into debt instruments are outpacing outflows. Maintaining these inflows will also support the CBE’s gradual shift toward an interest rate-cutting policy.