Goldman Says Buy Egypt Dollar Bonds

The pessimism priced into Egypt’s dollar bonds is overdone، according to Goldman Sachs Group Inc. and Pictet Asset Management، with the two banks saying they expect the nation to avoid default and perform well for investors.

Egypt’s dollar notes have declined 1.7% in January، their worst monthly performance since August. Moody’s Investors Service cut Egypt’s credit outlook to negative from stable earlier in the month، while the pound’s relentless slide in the black market has added to bearish sentiment as anticipation for another currency devaluation builds.

Distressed Sovereigns

Despite those challenges، the probability of Egypt defaulting on its debt is lower than what the market has priced، according to Kamakshya Trivedi، Goldman’s head of global foreign exchange، interest rates and emerging-markets strategy research. With the Federal Reserve expected to start cutting interest rates this year، the global macro backdrop will be favorable for lower-rated countries that were largely locked out of international debt markets earlier، he said in an interview.

“That’s already beginning to play out in some of the frontier economies and the hard-currency bonds have shown quite good positive momentum،” Trivedi said in Hong Kong. “There is probably quite a lot of upside in the distressed sovereign category،” and Egypt is a prime example، he said.

Egypt is mired in its worst economic crisis in decades at a time when the war between Israel and Hamas next door is adding to the pressure. It’s in talks with the International Monetary Fund to increase its $3 billion rescue program، with Moody’s saying there’s a high likelihood it can be raised to as much as $10 billion.

Bondholders can achieve “high single-digit” returns for exposure to developing markets like Egypt that have multilateral support، Mary-Therese Barton، chief investment officer for fixed income at Pictet، said in an interview this week.

No Defaults

Egypt faces about $3.3 billion of dollar bond payments this year، with the first due in March. The nation held about $35 billion in foreign-exchange reserves، though almost all of it is borrowed money from allies including Saudi Arabia، UAE، Kuwait، Qatar and Libya، according to Bloomberg Economics. 

The extra yield investors demand to own Egypt’s securities rather than US Treasuries was 990 basis points on Wednesday، according to indicative data from JPMorgan Chase & Co، putting it just below the 1،000 basis-point level widely considered to mark “distress.” The pound fell to about 60 per dollar on the black market this month، about double the official rate. 

Pictet، which manages more than $265 billion in assets، isn’t anticipating any sovereign defaults in developing nations this year، said Barton. In addition to Egypt، she said the firm favors the hard-currency notes of Angola، Nigeria and Ecuador.