Bloomberg News

Egypt Uncertainty Sends Bond Yield to Record, Suffocates Growth

December 15, 2011

Dec. 16 (Bloomberg) -- Egypt’s dollar bond headed for its worst weekly loss amid political uncertainty that has pushed the currency to a seven-year low and reduced economic growth to the lowest level in almost a decade.

Voting ended yesterday in the latest round of elections, the first since the uprising that ousted President Hosni Mubarak in February. While Islamist groups made early gains, the make-up of parliament won’t be clear until final results are announced in January, nor will the balance of power between the assembly, the Cabinet and the country’s ruling military council. Wrangling over the details of the handover to civilian rule has helped push bond yields to record highs.

The Cabinet will meet on Dec. 18 to discuss austerity measures after raising its deficit outlook for the fiscal year through June by 16 percent to 160 billion pounds ($27 billion), equivalent to about 10 percent of gross domestic product. Egypt may need to resume loan talks with the International Monetary Fund and tap financing sources in other Arab countries, International Cooperation and Planning Minister Fayza Aboulnaga said yesterday.

“This will not comfort investors because investment here is at a standstill, not just because of the unrest, but because there is confusion in government decision-making,” said Alia Mamdouh, an economist at Cairo-based investment bank CI Capital.

The yield on 5.75 percent notes due April 2020 surged to a record 8.02 percent at 9:04 p.m. yesterday and has jumped by almost a percentage point this week. Tourism and foreign investment have slumped since the popular uprising began in January. The pound has weakened almost 4 percent this year, to 6.02 per dollar, even as the central bank spent almost half its foreign exchange reserves.

IMF Negotiations

Talks with the IMF over a possible $3.2 billion loan were suspended in June. The deterioration of public finances since then will make negotiations harder, said Mamdouh. “The question is: Will the IMF give you the same offer? The credit rating is down, the reserves are falling sharply and they have now raised the deficit target.”

In November, Standard & Poor’s reduced Egypt’s credit rating for a fourth time this year to B+, four steps below investment grade.

The economy expanded at an annual rate of 0.5 percent in the three months through September, according to a Cabinet briefing document shown to Bloomberg News today. While this is more than the 0.4 percent growth of the preceding three months, “there are some negative indicators,” Aboulnaga said in an interview, without elaborating.

Spending Cuts

The government will announce a plan to cut expenditure by 20 billion pounds within days to reduce the budget deficit, Al Masry Al Youm reported, citing an unidentified official. The cuts won’t affect health care, education or pensions, the Cairo- based newspaper cited the official as saying.

Egypt missed its sale target for one-year Treasury bills yesterday, raising 3.38 billion pounds, or 120 million pounds less than it had aimed for. The Ministry of Finance paid an average yield of 15.226 percent on the securities, three basis points, or 0.03 of a percentage point, higher than the previous sale, according to its website and central bank data on Bloomberg.

Run-offs for the second round of elections, which covers Aswan, Menoufiya and seven other provinces, are due to begin on Dec. 21, with the third and final round scheduled for Jan. 3. Final results will be announced on Jan. 13.

--With assistance from Abdel Latif Wahba in Cairo. Editors: Digby Lidstone, Louis Meixler.

To contact the reporters on this story: Alaa Shahine at asalha@bloomberg.net.

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.


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