Bloomberg News

Egypt Pays Record Yields as Unrest Prompts S&P to Cut Rating

December 06, 2011

(Updates with dollar T-bill sale in fourth-last paragraph.)

Nov. 24 (Bloomberg) -- Egypt paid record borrowing costs and missed its Treasury-bill fund-raising target as deadly clashes this week prompted Standard & Poor’s to cut its credit rating for a fourth time this year.

The Arab country’s credit worthiness was lowered one level to B+, four levels below investment grade, the rating company said, signaling another possible cut. The Finance Ministry raised 2.17 billion pounds ($362 million) of the targeted 5.5 billion pounds today. The average yield on six-month notes jumped 42 basis points to 14.4 percent, the highest level since Bloomberg started tracking the data in 2006. The ministry sold one-year notes at a record yield of 14.932 percent.

Concern that clashes between police and protesters seeking an end to military rule could deplete Egypt’s international reserves, already at their lowest level in six years, sent 12- month pound non-deliverable forwards to 7.2250 a dollar. That reflects bets for the currency to fall from 6.0030 over the life of the contracts. The violence forced the government to quit days after Finance Minister Hazem El Beblawi said he may ask the International Monetary Fund for a $3 billion loan.

“The current situation is still very uncertain” even after the military decided to hold presidential elections by the end of June, Michael Cirami, who helps manage $12 billion at Boston-based Eaton Vance Corp., said in an e-mailed response to questions Nov. 22. “Investors will want to be compensated for this risk.”

Yields Surge

The clashes in Cairo’s Tahrir Square and other cities, which killed 38 people, heightened concern that parliamentary elections, due to be held from Nov. 28, may be delayed. The yield on the government’s 5.75 percent dollar bonds due April 2020 has climbed 77 basis points, or 0.77 percentage point, to 6.92 percent this week, the highest level since January. The military council, which took power after the ouster of Hosni Mubarak in February, said the vote would go ahead.

“There is an ongoing high, and recently increased, risk of challenges to political institutions that will possibly involve further domestic conflict,” S&P said. Moody’s Investors Service lowered Egypt’s rating three times this year to B1, four levels below investment grade.

Egypt’s foreign currency reserves fell about $14 billion this year to $22.1 billion in October, the lowest level since December 2005, central bank data show. The pound has declined 3.3 percent in 2011 to the weakest level on a closing basis since December 2004.

Rate Decision

“Until there is a stabilization in the political and macro-economic environment, Egypt will continue along a path that will end in a sharp devaluation,” Ashok Parameswaran of Invesco Advisers Inc. said in an e-mailed response to questions on Nov. 23.

The central bank’s Monetary Policy Committee will probably leave its benchmark interest rate unchanged at 8.25 percent today even as economic growth slows and inflation eases, according to all four economists surveyed by Bloomberg.

“The central bank of Egypt will now have an easing bias, but the pressure on the T-bill market and the currency will make it hard for them to cut interest rates in the short- to medium- term,” Liz Martins, a Dubai-based senior economist at HSBC Holdings Plc, said by e-mail.

Stocks Slump

The unrest sent the benchmark stock index tumbling 8.4 percent this week, extending the losses this year to 47 percent and making it the world’s third-worst performer after measures in Cyprus and Greece.

The slump has left the shares in the EGX 30 Index valued at an average 5.2 times estimated earnings, compared with 9.7 times for the Stoxx Europe 600 Index and 9.8 times for the MSCI Emerging Markets Index, according to data compiled by Bloomberg.

Not all investors share the bearish view.

The military’s decision to form a “national salvation government” may help “assuage nerves if the composition is representative,” Emad Mostaque, London-based analyst at Religare Hichens Harrison, said in an e-mailed report on Nov. 22. “We maintain our long-term ‘buy’ on the Egyptian market.”

Egyptian shares rallied for a second day after 10 days of losses. The EGX 30 Index advanced 1.7 percent to 3,780.13 at the 2:30 p.m. close in Cairo. Orascom Telecom Holding SAE, North Africa’s biggest mobile phone company by users, surged the most in more than two months.

“The market was very discounted because of the unrest,” said Omar Darwish, equity sales trader at Cairo-based Commercial International Brokerage Co. “Foreign investors in particular are seeing buying opportunities for the big caps.”

Seeking Pound Deposits

The economy has lost as much as $40 billion in output since the January revolt, according to Simon Williams, chief Middle East and North Africa economist at HSBC. Economic growth slowed to 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. Inflation eased for a sixth month to 7.1 percent in October.

While local-currency deposits in Egyptian banks are little changed in the first nine months this year at 673 billion pounds, dollar-denominated deposits increased 12 percent to the equivalent of 17.7 billion pounds, central bank data show.

The National Bank of Egypt and Banque Misr, the country’s two biggest banks by assets, said in October they would pay investors 2 percentage points more, or 11.5 percent, on three- year, pound-denominated certificates. Several other banks such as Commercial International Bank Egypt SAE, the biggest publicly traded lender, have since followed by raising their rates to around 11 percent.

Dollar T-Bill Sale

The country plans to start selling one-year treasury bills denominated in dollars to “diversify” its funding, outgoing Finance Minister Hazem El Beblawi said today. The ministry is seeking to raise $2 billion from the auction on Nov. 29.

A “key issue now is whether domestic savers feel sufficiently compensated by the high rates of interest on pound deposits, or will they demand dollar savings accounts even at very low interest rates?” said Gabriel Sterne, a London-based senior economist at Exotix Holdings Ltd., which offers investment banking services. “An IMF program will be of some boost to confidence.”

Asking the Washington-based lender for funds will be the responsibility of the new government, El Beblawi said in a phone interview yesterday. “If the new government is formed within a reasonable time-frame, it will have to make the decision on whether or not to proceed.”

Egypt needs a government “which can engage with the IMF,” Cirami of Eaton Vance said. “So there is risk that the departure of the government will delay the timing of the program. It’s clear that risks are growing.”

--With assistance from Zahra Hankir in Dubai and Mariam Fam in Cairo. Editors: Claudia Maedler, Shaji Mathew

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

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


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