Emerging market investors are preparing to re-enter the Egyptian domestic debt market, as they are attracted by the pound's decline and record returns compared to its peers, Bloomberg reported on January 20th.

Attracting foreign investors back into the domestic debt market is crucial for the Arab world's most populous country, which has shied away from foreign capital markets for almost a year.

According to Bloomberg, asset management firm Columbia Threadneedle Investments believes that the Egyptian pound is already undervalued by 25%, when measured at the real effective exchange rate, a measure of the currency's competitiveness vis-a-vis trading partners.

“After holding an underweight position for much of 2022, I finally see the conditions for re-entering the local market,” Gordon Bowers, a London-based analyst at Columbia Threadneedle Investments in London, told Bloomberg.

“I would keep some dry powder available to build an overweight if the currency further overshoots fair value,” Bowers added.

For its part, Deutsche Bank expects the pound to weaken by up to 10% to 33 against the dollar before stabilizing.

With inflation exceeding 21% in December, the CBE may have to raise interest rates further to attract more foreign investment, according to Matthew Vogel, London-based portfolio manager and Head Strategist for Frontier and Emerging Markets at FIM Partners.

“With inflation spiking to close to 30% in the coming months and no FX anchor given the change in regime, we still think the CBE has to show more mettle,” he said.

On January 11th, the Egyptian pound traded in a volatile manner hitting a new all-time high of more than EGP 30 against the dollar, after plummeting again at the close.

It is worth noting that the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided at its latest meeting on December 22nd to raise key interest rates by 300 basis points (bps).

In October 2022, the CBE said it would adopt a more flexible exchange rate policy to back macroeconomic stability and sustainable growth, devaluing the pound by over 16% from 19.67 per dollar to 22.85, in order to absorb the economic shock triggered by the Russian-Ukrainian war.

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