Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Egypt Is Becoming the New EM Frontier
Transcript
- Lucas: So Egypt is having a moment — and I don't say that lightly about a country that has been in and out of crisis for the better part of a decade. Luna: A moment in what sense? Because last time we talked about Egypt on this show, it was all about the currency collapsing and the IMF program stalling. Lucas: Right, that was 2023, early 2024. The pound lost about 40 percent of its value between February and March of 2024 alone. But since then, something shifted. The government finally let the currency float more freely, the IMF approved a bigger loan — eight billion dollars — and then came the really big news. Luna: The Ras El Hekma deal. That was the total game-changer, right? Lucas: Exactly. In February 2024, Abu Dhabi's sovereign wealth fund ADQ agreed to inject $35 billion into Egypt for the development of the Ras El Hekma peninsula on the Mediterranean coast. Twenty-four billion of that was upfront cash. That single deal basically wiped out Egypt's foreign-exchange shortage overnight. Luna: It's staggering when you think about it. Egypt was staring at a funding gap of maybe fifteen to twenty billion, and then one deal covers more than that. Lucas: And the market noticed. Since the deal was announced, foreign portfolio inflows have come back. The Egyptian stock exchange — the EGX 30 — is up about 35 percent in dollar terms over the past twelve months. That's one of the best returns in the entire emerging-market universe. Luna: And this is happening against a pretty tough backdrop for EMs. The trade-weighted dollar index is at 119.3 as of mid-May, still close to multi-decade highs. That usually crushes countries with dollar-denominated debt. Lucas: It does. And Egypt has historically been one of the most vulnerable — it's got about $165 billion in external debt, much of it in dollars. But the Ras El Hekma cash gave them a buffer. They used part of it to pay down some expensive short-term liabilities, and the central bank has been able to rebuild its net foreign reserves to around $46 billion, from a low of about $35 billion. Luna: So the question becomes: is this a genuine turnaround, or is it just one big sugar daddy propping things up? Lucas: I think it's a bit of both. On the one hand, the structural reforms are real. The currency is more flexible, the central bank hiked rates aggressively — the overnight rate is at 27 percent — and inflation has come down from a peak of 38 percent to around 26 percent. That's still high, but directionally positive. Luna: Twenty-seven percent rates. That crushes domestic demand, but it does attract carry traders. Lucas: Right. And that's exactly what's happened. Since the float, non-resident holdings of Egyptian Treasury bills have risen from essentially zero to about $15 billion. The carry trade is back. But it's hot money, and it can leave just as fast. Luna: Which brings us to the external environment. If the dollar keeps strengthening, and if the Fed stays hawkish, that carry trade could reverse. Lucas: And that's the real risk. The US dollar index is up again this year, and the yuan has weakened to 6.81 per dollar. That's a headwind for all EMs, because a stronger dollar tightens global financial conditions. Egypt is especially exposed because it imports so much — food, energy, machinery. Luna: And let's not forget the regional geopolitics. The war in Gaza, disruptions in the Red Sea — that hits the Suez Canal revenue, which is a major source of foreign exchange for Egypt. Lucas: Exactly. Suez Canal revenues were down about 50 percent in the first quarter of 2026 compared to the same period last year, because of the Houthi attacks. The government has been managing, but that's a structural hole. The Ras El Hekma money helps, but it's a one-time fix, not a recurring revenue stream. Luna: So what's the bull case for Egypt as an EM investment right now? Lucas: The bull case is that you're buying at the beginning of a reform cycle. The IMF program is on track, the currency is competitive, and the government is finally serious about privatisation — they've committed to selling stakes in 32 state-owned companies by the end of 2026. If they execute, that could unlock more foreign direct investment. And the valuations on the EGX are still cheap: the forward price to earnings ratio is around 8.5, compared to 15 for the MSCI Emerging Markets index. Luna: That's a significant discount. But cheap can stay cheap for a long time if the fundamentals don't improve. Lucas: Absolutely. And that's the bear case: execution risk is massive. The military still controls large parts of the economy, bureaucracy is heavy, and the private sector has been crowded out for years. Plus, the demographic dividend — 60 percent of the population is under 30 — could be a liability if job creation doesn't pick up. Luna: And there's the social side. If you have 27 percent interest rates and inflation still at 26 percent, ordinary Egyptians are hurting. That creates political risk. Lucas: No doubt. President el-Sisi has been in power since 2014, and while there's no visible opposition, social unrest could flare up if the cost of living keeps rising. But the government seems aware of that — that's part of why they're pushing the imf mandated subsidy reforms slowly, phasing out fuel subsidies over five years instead of all at once. Luna: So it's a story with a lot of moving parts. For the emerging market investor, it's not a straightforward buy. Lucas: No, it's not. But it is one of the more interesting stories in the EM space right now. You've got a country that was essentially in default on its external obligations two years ago, and now it's issuing Eurobonds again — they did a $2 billion deal in April that was oversubscribed. The market is willing to give them a chance. Luna: Walking through the economy like this — it really does make something click, doesn't it? It's not just about the numbers, it's about connecting the dots — geopolitics, currency, reform momentum. Lucas: That's exactly why we do this show. And you know, we deliberately keep it free and ad-free because we think this kind of analysis should be accessible. If you find value in it and want to support that choice, the link is buy me a coffee dot com slash fexingo. No pressure, just an option for those who find it useful. Luna: Yeah, it's a small gesture that goes a long way in keeping the podcast independent and focused on what matters. Lucas: Back to Egypt — one more thing I think is worth watching: the Ras El Hekma deal could be a template for other dollar-strapped emerging markets. We're already seeing similar conversations in Pakistan and Sri Lanka, where Gulf sovereign wealth funds are stepping in with large infrastructure investments in exchange for land or strategic assets. Luna: It's a new model of FDI. Not just buying a factory, but buying a whole coastal development. Lucas: Exactly. And it changes the risk calculus. If you're investing in Egyptian local currency debt today, you're betting that the reform momentum continues and that the Gulf money stays committed. It's not a sure thing, but it's a lot better than it was in 2023. Luna: So summing up: Egypt is a high-conviction story but a high-risk one. Worth watching, worth researching, but not a default buy. Lucas: I'd put it in the 'deep dive' category. If you're an EM investor with a long horizon and a tolerance for volatility, it could be rewarding. But you need to monitor the currency, the political situation, and the pace of reform. It's not for the faint of heart. Luna: Well, this is the Emerging Markets Podcast — we're here for the nuance. Thanks for joining us. Lucas: Next time we'll look at another frontier. Until then, keep asking the hard questions.