Bloomberg News

Egypt Bond Sale Beats Estimates Before IMF Visits: Arab Credit

October 24, 2011

Oct. 24 (Bloomberg) -- Egypt sold five- and seven-year bonds today at lower costs than analysts estimated as the country prepares to receive an International Monetary Fund delegation to revive loan negotiations.

The Arab country, whose popular uprising ended Hosni Mubarak’s three-decade rule in February, sold five-year treasury bonds at an average yield of 14.26 percent, less than the 14.42 percent-average forecast of five fixed-income analysts surveyed by Bloomberg. The average yield on seven-year notes was 14.52 percent, compared with an estimate of 14.8 percent.

“The main reason for issuing long-term debt at this time may have been to show the IMF that Egypt can still do so,” said Nour Mohei-el-Din, assistant general manager for treasury at BNP Paribas Egypt. “But today’s sale was mostly covered by local investors, who have to hold long-term debt to meet regulations.”

Egypt, which was cut to three levels below investment grade by Standard & Poor’s on Oct. 18, raised a combined 2.5 billion pounds ($419 million) at today’s auctions, meeting its target. It’s the first debt sale with a maturity of more than three years since the start of the uprising in January. Economic growth will accelerate, reaching 6.5 percent in 2016 after recording 4 percent growth in 2013 and 1.2 percent this year, according to International Monetary Fund forecasts.

Sales Resume

An IMF mission will visit Egypt this week for talks with the government, Finance Minister Hazem El Beblawi said yesterday. The government will restart talks on a $3 billion loan, Al Ahram newspaper reported today, citing International Cooperation Minister Faysa Aboulnaga. Egypt rejected a similar loan in June as public opposition to the fund mounted.

Foreign investors sold 34.5 billion pounds in treasury bills in the six months following January, leaving local banks to finance the government’s needs and pushing borrowing costs to the highest levels in almost three years.

Egypt canceled bond sales valued at 19.5 billion pounds in the period, redirecting its fund raising to treasury bills as it sought to avoid high yields in the long term. Sales resumed on July 21. The central bank, which holds the auctions on behalf of the Finance Ministry, issued three-year securities last week yielding 14 percent.

“The main risk to Egypt, and particularly the exchange rate, are over the next two years, so I don’t see why the bonds would need yields very much more” than the three-year securities, Gabriel Sterne, London-based senior economist at Exotix Holdings Ltd., said in an e-mailed response to questions Oct. 20. “As the state-owned banks are there as a backstop, I wouldn’t expect yields to have to rise all that much.”

Currency Depreciation

The Egyptian pound has lost 2.7 percent since the start of the year to 5.9675 per dollar at 2:15 p.m. in Cairo. Twelve- month non-deliverable forwards were at 6.7 per dollar, the highest level in more than six months. The contracts reflect an expectation for the currency to weaken 12 percent over their duration.

The yield on the country’s 5.75 percent, 10-year dollar bond due in 2020 fell to 5.8 percent from a post-revolutionary high of 6.93 percent in March. The benchmark EGX 30 Index has rebounded 9.5 percent from a more than two-year low on Oct. 10.

Still, Egypt’s prolonged transition of power from the military to an elected government may delay inflows of foreign investment, leading to a further deterioration of international reserves in the absence of financial support from donors, Barclays Plc said last week.

Foreign-currency reserves have shrunk an average $1.33 billion per month this year to $24 billion at the end of September, the lowest level in more than five years. The balance of payments in the fiscal year to June recorded a $9.8 billion deficit after a $3.4 billion surplus the previous year.

Default Risks

The country’s credit-default risk surged last month to 506 basis points, according to data provider CMA as Europe’s debt crisis worsened and local political infighting between activists and the ruling military council threatened to delay parliamentary elections due to be held in November.

The contracts were at 435 today, giving Egypt a 26 percent probability of default on government debt in the next five years. That makes Egypt the riskiest in the Middle East, followed by Dubai. CMA is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

“We’re looking at a country that was just downgraded a week ago, has a weakening currency and carries close to 1 trillion pounds of debt,” Moustafa Assal, head of fixed income at Cairo-based investment bank Beltone Financial, said by phone yesterday. “There’s a lot of work that needs to be done before we start talking about an improvement in outlook.”

Delivering Support

Egypt has asked Persian Gulf governments to invest in its debt to help lower borrowing costs. Saudi Arabia plans to put $500 million into Egypt’s T-bills and will give the Arab country another $500 million to finance its budget deficit, the kingdom’s ambassador to Egypt Ahmed al-Qattan said this month. The announcement came after Qatar provided Egypt with $500 million in budgetary support earlier this month.

Obaid Humaid Al-Tayer, United Arab Emirates state minister for financial affairs, said Oct. 22 discussions were still under way on the “mechanism” of delivering a $3 billion aid package to Egypt. Saudi Arabia is also still in talks with Egypt about the kingdom’s pledged budget support, Finance Minister Ibrahim Al-Assaf said.

“The government has to find a way to reduce its reliance on short-term debt,” Mohamed Kotb, Cairo-based asset management director at Naeem Financial Investments, said by phone yesterday. “Long-term debt sales send a message to investors that it has a plan to help the economy recover.”

--With assistance from Andrew J. Barden in Dubai. Editors: Claudia Maedler, Susan Lerner

To contact the reporters on this story: Ahmed A Namatalla in Cairo at anamatalla@bloomberg.net; Alaa Shahine in Dubai at asalha@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net


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