(Bloomberg) — Citigroup Inc. is turning bullish on Egypt’s battered dollar debt, arguing that the North African nation will obtain access to financing as it’s seen as too important geopolitically to be allowed to fail.
That will support the bonds of the most populous Arab nation as it grapples with its worst economic crisis in years, Citigroup strategists said in a note. Sales of state assets are also picking up and the government may be on track to meet targets set by the International Monetary Fund, they said.
Citigroup is going overweight Egypt in its model portfolio, while reducing its exposure to Jordan — which borders the West Bank — as a hedge to any escalation in regional tensions. Egypt’s dollar debt has been the best performer in the Middle East since Hamas’s Oct. 7 attack on Israel, while Jordan’s bonds have been among the biggest losers, according to Bloomberg indexes.
“Egypt sovereign risk sentiment might be at an inflection point,” Nikola Apostolov and Luis Costa, strategists at Citigroup, wrote in a note. “We are seeing some positive momentum in the privatization process while official sector support might be ramped up given the geopolitical context.”
Gulf Funding
The central bank is close to securing as much as $5 billion in new deposits from Saudi Arabia and the United Arab Emirates, al-Borsa reported this week. Egypt, which reached a deal with the IMF in December, is also in talks on boosting that rescue program to over $5 billion from $3 billion.
“While geopolitical risks are likely to weigh on the region in the coming months, in our view Egypt’s geostrategic position may reinforce its bargaining power with its multilateral and Gulf Cooperation Council creditors and catalyze increased new financing,” Citigroup strategists said.
With long-held ties to Israel and a border with Gaza, Egypt’s stance is shaping up as key to the fate of any refugees and a sustained flow of aid for the besieged territory’s 2 million residents. French President Emmanuel Macron held talks in Cairo this week with his Egyptian counterpart Abdel-Fattah El-Sisi after Israel cut off crucial supplies to Gaza in response to Hamas’s deadly assault.
Citigroup strategists are recommending to buy Egypt’s bonds maturing in 2031 and 2050, in what they described as “a barbell strategy.”
The bonds are relatively cheap, according to Citigroup. The risk premium that investors demand to hold the nation’s bonds over US Treasuries narrowed by 128 basis points over two days to 1,209 basis points on Wednesday.
The spread reached a record high of 1,486 basis points in May as concerns over the risk of a default grew, with the IMF delaying its review of Egypt’s program. The nation, which has been locked out of capital markets abroad as borrowing costs rise, is now unable to access the next tranche of its IMF loan.
The risk to a bullish Egyptian trade: a sharp geopolitical escalation or a derailment of the negotiations with the IMF, Citigroup said.
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Source: bnnbloomberg.ca
