Bloomberg News

Egypt Government Set for Showdown on Foreign Loans: Arab Credit

October 31, 2011

Oct. 31 (Bloomberg) -- Egyptian government officials are campaigning to overcome public opposition to foreign loans as they seek to reduce the highest borrowing costs since 2008. It won’t be easy.

Finance Minister Hazem El Beblawi said on Oct. 26 Egypt needs an “urgent liquidity injection” to help finance the budget deficit. Relying on domestic lenders for funding reduces available resources for private companies, he said. Borrowing from abroad won’t hurt the economy, Deputy Central Bank Governor Hisham Ramez told Al Shorouk daily ahead of last week’s visit by a delegation from the International Monetary Fund to discuss assistance to Egypt.

The efforts of the interim government are set to collide with the start today of a drive for more public scrutiny over foreign borrowing. Under the slogan “Open Your Eyes, The Debt Comes Out of Your Pocket!” the campaign includes political activists and economists who helped organize this year’s revolt that ousted President Hosni Mubarak. They opposed a $3 billion IMF loan that Egypt negotiated before turning it down in June under popular pressure.

“Borrowing from abroad is an easy solution for the government, which is just transferring the problem to future generations,” Wael Khalil, an activist and a campaign organizer, said in a telephone interview from Cairo yesterday. “Officials feel the public pressure and this is a change in its own right. The country is not just theirs any more to take whatever decision they want. They need to persuade us.”

More Expensive Debt

Delays in aid from lenders such as the IMF may force the government, whose credit rating was last week lowered for a third time this year by Moody’s Investors Service, to pay more to borrow locally, said Mona Mansour, co-head of research at Cairo-based investment bank CI Capital. The yield on 1-year treasury bills soared 342 basis points, or 3.42 percentage point, this year to 13.85 percent at the most recent auction, near the highest level since November 2008, according to central bank data on Bloomberg.

By contrast, the yield on Egypt’s 5.75 percent dollar bond due in April 2020 is 5.73 percent, according to data compiled by Bloomberg. The extra yield investors demand to hold Egyptian debt instead of U.S. Treasuries jumped 157 basis points this year to 378, according to JPMorgan Chase & Co.’s data. Middle East spreads for the period rose 53 basis points on average to 403, the data show.

Domestic, Not Foreign

Activists including Khalil say the government should exhaust domestic solutions before resorting to foreign borrowing. They blame the government for reversing a decision to impose a capital-gains tax on stocks dividends after pressure from businessmen such as billionaire Naguib Sawiris.

At the heart of their campaign are calls for raising revenue through measures like a real-estate tax on the rich and removing energy subsidies for industries. The government says imposing taxes won’t solve short-term financing problems.

While it’s yet not clear how much support the campaign would garner, it taps into a vein of resentment among Egyptians toward debt that can be traced to a 19th century borrowing binge by autocratic rulers such as Khedive Ismail. The experience, still taught at local schools, cost the country its stake in the Suez Canal before the 1882 British invasion.

The anti-debt campaign also aims to convince foreign creditors to forgive loans taken during the Mubarak rule, said Samer Atallah, assistant professor of economics at the American University in Cairo.

‘Enough Borrowing’

“We have to send a clear message: all this borrowing from abroad is being repaid from the pockets of every Egyptian citizen,” he said in a telephone interview yesterday. “Enough borrowing; it doesn’t solve the economic problems. It’s like treating a cancer patient with aspirin.”

The campaign will kick off with a public event in Cairo and London, according to an e-mailed statement. It has set up a Facebook page, attracting more than 400 members before its official start.

El Beblawi has declined to say whether the government would seek another IMF loan. He wasn’t immediately available to comment when contacted by Bloomberg News yesterday in Cairo.

The standoff shows the need for a swift political transition from the military, which took interim power from Mubarak in February, to an elected government that can form a clear economic policy, said Mansour of CI Capital. Under the current timeline, the generals may stay in power until 2013.

‘Nothing Is Clear’

“This isn’t a long-term government, so it’s unable to take long-term decisions,” she said. “Whether to go to the IMF or not, whether to impose a real-estate tax this year or next. Nothing is clear or transparent. The rate of change in decisions is really quick.”

To be sure, analysts such as Raza Agha, a London-based economist at the Royal Bank of Scotland say the government is likely to push for an IMF loan in the absence of aid from Arab countries. Even an elected government would find it difficult not to seek foreign assistance, said Liz Martins, Dubai-based senior economist at HSBC Holdings Plc.

“There’s not much option, and any pragmatic government is likely to accept foreign aid,” she said in an e-mailed response to questions yesterday. “The kind of revenue growth that would be needed is unrealistic in the current economic climate, foreigners are likely to remain very wary toward the treasury- bill market, and local banks are already stretched.”

The economy grew 1.8 percent in the fiscal year that ended in June, compared with 5.1 percent in the previous 12 months, according to government figures. Foreign investors sold 36 billion pounds ($6 billion) of their treasury-bill holdings in the first seven months this year, according to the most recent central bank data.

Finance Ministry Plans

The Finance Ministry plans to raise 24.5 billion pounds at auctions of treasury bills and bonds this week, according to central bank data on Bloomberg. The ministry will likely miss its target for a budget deficit of 8.6 percent of economic output this fiscal year, according to estimates from analysts at Moody’s and the Royal Bank of Scotland.

Still, opposition to foreign loans, in particular from international institutions such as the IMF, may also come from the Muslim Brotherhood, the country’s biggest Islamist group.

“I don’t know why they’re talking about loans again now,” spokesman Mahmoud Ghozlan said in a telephone interview yesterday, referring to the government. “It’s a bad thing to be in debt. With debt, one loses part of one’s freedom and will. If they didn’t intervene in political issues, they still might intervene in economic issues as creditors.”

Former Egyptian Finance Minister Samir Radwan, who was forced to turn down the $3 billion IMF loan, said the assistance came with no strings attached. He was replaced in a cabinet reshuffle in July.

For activists such as Khalil, this year’s revolt ensures that the public scrutiny would go beyond one particular loan.

“From now on, we will all look at the budget,” he said. “We will all see how much is going toward debt servicing and how much is going to education and health care. We will see where is our money going.”

--With assistance from Ahmed A Namatalla in Cairo. Editors: Riad Hamade, Claudia Maedler

To contact the reporters on this story: Alaa Shahine in Dubai at asalha@bloomberg.net; Mariam Fam in Cairo at mfam1@bloomberg.net

To contact the editors responsible for this story: Claudia Maedler at cmaedler@bloomberg.net; Andrew J. Barden at barden@bloomberg.net


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