Egypt's currency devaluation may eventually bring foreign money into the country, but fund managers say uncertainty about the economy means there will be no quick inflows of portfolio investment from abroad.
To ensure its currency stabilizes after last week's devaluation, Egypt needs a surge of hard currency receipts to cover a current account deficit that totaled $18.7 billion in the year to last June.
Foreign direct investment, at $6.8 billion, is expected to change only slowly because companies' decisions are complex. Egypt's economy is so import-dependent that an export boom looks unlikely any time soon.
A cheaper Egyptian pound may encourage more Egyptians working overseas to send money home, but remittances – which totaled $17.1 billion – have changed little over the years.
That leaves foreign portfolio investment as one of the best potential sources of new money. Before political upheaval in 2011 led to years of economic instability, Egypt attracted billions of dollars of such investment annually; last fiscal year, there was a net outflow of $1.3 billion.
But many foreign fund managers said that while the currency shift was positive because it largely removed a massive overvaluation of the pound, other types of risk would continue deterring investment.
Although foreign funds purchased Egypt's dollar bonds at the end of last week, there was little sign of foreign buying of local currency assets.
For that to happen, several managers said, Cairo will have to show it can replicate the success of other countries in International Monetary Fund lending programs, such as Pakistan – a process that could take money months.
The devaluation "definitely makes it more attractive as the pound is now no longer such a risk," said Allianz Global Investors portfolio manager Shahzad Hasan.
"But at this level the good news is priced in on the (dollar) bonds. Now the focus switches to the implementation of the IMF program, which is more difficult."
The devaluation took the pound from 8.8 against the dollar to around 15.35-15.75.
Many foreign investors will be unwilling to put money in local currency assets until they think the pound has found a floor, and that point may be distant. Non-deliverable forward contracts price the pound at 17 per dollar in 12 months.
That is partly because of a backlog of demand for dollars. Analysts at Citi estimate this at $9-11 billion, and say it must be cleared before the pound steadies.
Another risk is inflation. Although imports of most goods were already being paid for at the black market exchange rate, the devaluation will raise prices for imported fuel and possibly essential foods. Citi estimates this will add 3 percentage points to its projected year-end inflation rate of 14 percent inflation, and a further 1 or 2 points early next year.
Citi said that while Egyptian Treasury bills with yields around 22 percent looked "optically interesting", interest rate increases of another 2 or 3 percentage points could be needed to stabilize inflation.
Another problem is the stock market, with a capitalization of under $30 billion, has become too small to absorb much new money.
The market in local currency government bonds and T-bills, which totals about 1.40 trillion pounds, is much bigger.
Foreign participation in local bonds is virtually nil but a few years ago it was as much as $10 billion, said Renaissance Capital, which expects foreigners to return over the next six to 12 months.
But there are logistical difficulties. "From a practical perspective, it's still difficult to deploy capital into Egypt," said Kieran Curtis, portfolio manager at Standard Life Investments.
Custodian banks are cautious in offering services, because the Cairo bourse closed during political unrest, he noted.
"We have been involved in the hard currency bonds, and at some point we will look at the T-bills."