Egypt: When hot money is not so hot

Egypt has become a bit too reliant on portfolio inflows to keep its external position afloat. This is a vulnerable position, and a sudden shift in emerging market sentiment could see capital inflows reverse – posing a serious threat to foreign reserves.

What you will learn:

• With the net FDI position facing increasing pressure and surging commodity prices driving the current account deeper into deficit territory, Egypt is becoming almost solely reliant on portfolio inflows and external borrowing to fund its external position.
• Against a backdrop of elevated global inflation and persistent supply-side worries, the situation for EMs is becoming more uncertain. The US Fed is also turning increasingly hawkish as high inflation and stronger confidence in the domestic recovery & labour market strengthen the case for tighter monetary policy.
• A weaker currency would have negative effects in the short term – such as increased imported inflation and higher US dollar-denominated debt repayments in local currency terms.