Bloomberg News

Egypt Pays Less Than Spain for Euros as IMF Talks Persist

November 20, 2012

Egypt locked in lower borrowing costs than higher-rated Spain in selling a more-than-planned 640.2 million euros ($817 million) of debt, as prospects for an International Monetary Fund loan accord improved.

The government, whose debt carries a junk grade of B2 from Moody’s Investors Service, raised 60 percent more than it sought yesterday through the offer of one-year notes, paying an average yield of 2.548 percent, central bank data compiled by Bloomberg show. The yield compares with 2.8 percent on similar-maturity notes from Spain, rated the lowest investment grade of Baa3 by Moody’s, and 12.985 percent on Egyptian pound notes.

Finance Minister Momtaz el-Saieed said in an interview in Cairo that “some small modifications” are being made to the agreement with IMF officials and a letter of intent may be signed today. The government has requested a $4.8 billion loan from the Washington-based lender. Egypt’s economy may expand 3.2 percent next year after growth fell to 1.8 percent in 2011, the slowest pace in about two decades, according to the median of 10 economists’ estimates compiled by Bloomberg.

“Expectations that an IMF deal will be reached are driving demand especially for local banks which are trying to cover rising foreign-currency deposits,” Nour Mohei-El-Din, assistant general manager for treasury at BNP Paribas Egypt, said by phone yesterday.

Egypt first sold euro-denominated notes in August, as the pound weakened 0.4 percent against the dollar and 2.6 percent versus the euro. One-month volatility on the pound has risen 70 percent this quarter, the biggest advance among 10 Middle Eastern currencies tracked by Bloomberg after Israel’s shekel, data compiled by Bloomberg show.

‘Increased Appetite’

At the first sale, international investors bought 20 percent of securities and there was “increased appetite” from both locals and foreigners for yesterday’s issue, the central bank said in a statement. The government has said the IMF agreement would unlock international aid and help lower the highest budget deficit in at least five years. The shortfall reached 11 percent of gross domestic product in the fiscal year that ended in June, government data show.

Egypt’s foreign-currency reserves plunged more than 50 percent after the chaos that accompanied the January 2011 uprising. The confusion and political vacuum that followed the overthrow of President Hosni Mubarak prompted foreign investors to dump government securities, pushing yields on dollar- denominated government debt due in 2020 to as high as 8.79 percent in January. The bonds yielded 5.34 percent at 1:22 p.m. in Cairo, data compiled by Bloomberg show.

IMF ‘Key’

“From a macroeconomic perspective, considering the reserve loss they had, the IMF program is the key,” Raza Agha, chief Middle East and Africa economist at VTB Capital Plc, a unit of Russia’s second-largest bank, said by phone yesterday from London. “A successful auction or two should not make the Egyptian authorities or investors complacent. Yes you are being helped by global liquidity positions, and by promises of donor support, but you need a policy program that is provided credibility with an IMF program.”

Facing higher domestic borrowing costs, the government started selling foreign-currency domestic debt a year ago, raising $5.82 billion from dollar-denominated notes and 1.15 billion euros. Egypt plans to raise $1.5 billion of one-year dollar T-bills on Nov. 26, the central bank said in a statement. A similar amount of debt matures this month.|

“Over a one-year horizon few people would be worried about Egypt defaulting on a foreign-currency bond,” Gabriel Sterne, a fixed income economist at Exotix Holdings Ltd. in London, said by phone yesterday.

Mursi Election

The average yield on Middle East sovereign debt has tumbled 98 basis points, or 0.98 percentage point, this year to 4.015 percent yesterday, according to the HSBC/Nasdaq Dubai Middle East Conventional Sovereign US Dollar Bond Index.

Yields on Egypt’s 2020 dollar bonds have plunged 253 basis points since the June election of President Mohamed Mursi, data compiled by Bloomberg show. Mursi, who won Egypt’s first free election, restarted IMF talks and raised the loan request by 50 percent.

Gross official reserves rose $440 million to $15.5 billion in October from a month earlier after the country received $1 billion in loans from Qatar and Turkey. Qatar is set to provide another $500 million on Nov. 30, part of a $2 billion aid package, Egypt’s Finance Minister El-Saieed said in a phone interview Nov. 11.

“We see long-term growth opportunity in Egypt and the euro presents a more attractive investment compared with the Egyptian pound due to its volatility,” Hakim Aziez, the London-based head of investment at GCA Asset Management, which bid for the notes yesterday, said by e-mail.

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: Alaa Shahine at asalha@bloomberg.net


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