Bloomberg News

Top Fund Manager Sees Egypt Yields Shunning Unrest: Arab Credit

February 25, 2013

Egypt’s borrowing costs are set to drop as the slowest loan growth three years amid escalating political turmoil prompts banks to park funds in government notes, the Middle East’s top money markets fund manager said.

“Banks have nowhere else to put their money,” Khalil El Bawab, director of fixed income at Cairo-based EFG-Hermes Holding, said by phone on Feb. 19. “Although there’s a lack of visibility on where the country is going, the market’s risk appetite has been adjusted due to the persistence of instability in the last two years.”

The yield on one-year Egyptian pound Treasury bills is poised to decline another 25 basis points in the coming month after dropping 55 basis points from January’s four-month high to 14 percent last week, El Bawab said. EFG-Hermes’ Bank of Alexandria Fixed Income Fund, which El Bawab manages, has returned 2.7 percent this year, ranking first among 57 regional funds tracked by Bloomberg.

Local banks have bought most government debt since the ouster of President Hosni Mubarak two years ago led foreign investors to exit their holdings and political turmoil muted loan demand. Banks have relied on the Middle East’s second highest-yielding government debt after Yemen to boost profit as the average debt-to-equity ratio of Egyptian companies remained about two thirds below peers in the Middle East and Africa, according to data compiled by Bloomberg.

Spurring Profit

Commercial International Bank Egypt SAE (COMI), the country’s biggest publicly traded lender, posted loan growth of 2.6 percent last year, the slowest pace since 2002. Still, a 41 percent jump in exposure to government debt spurred net income by 38 percent, its financial statements showed last week.

Foreign investors continue to avoid Egyptian fixed-income securities due partly to delays in negotiations with the International Monetary Fund for a $4.8 billion loan. The Islamist government, led by President Mohamed Mursi, has put off talks since an initial deal was signed in November as it struggles to build consensus needed to implement reforms including tax increases.

IMF Agreement

Opposition to Mursi has been building since his November decree to grant himself greater powers and push through a new constitution. Mursi’s critics say the president, who became the country’s first democratically elected civilian leader in June, has sought to advance the interests of the Muslim Brotherhood while failing to revive the economy or address social needs. More than 50 people have been killed in clashes this year.

“The government is hoping yields will remain relatively low while the political dispute moves toward a resolution and an IMF deal is signed,” said El Bawab, whose fund has returned 11.3 percent over the past year. “So far it has worked. But if we don’t see positive developments in the next month, that will all change.”

Moody’s Investors Service lowered Egypt’s credit rating this month for the fifth time in two years on concern political bickering will hinder Egypt’s ability to secure and implement an IMF agreement. The economic “crisis” can’t be resolved without the accord, Planning and Investment Minister Ashraf El-Arabi said Feb. 21. The government will invite the fund to Cairo to resume talks within a week, he said.

Political ‘Deterioration’

The most recent bout of violence that started Jan. 25 has driven the yield on the government’s $1 billion of 5.75 percent dollar bonds due in April 2020 up 150 basis points, or 1.5 percentage points, to 7.06 percent yesterday.

The cost of protecting Egypt’s debt against default for five years has soared 164 basis points in the same period to a seven-month high of 609 on Feb. 22, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

“We remain underweight on Egyptian assets,” Raza Agha, chief Middle East and Africa economist for VTB Capital Plc, wrote in an e-mailed report Feb. 21. “In the face of this deterioration on the political front that potentially extends the timeline to an IMF program, prospects for further ratings downgrades remain significant.”

‘Not Fundamentals’

Still, local-currency government borrowing costs haven’t followed dollar bond yields as banks struggle to revive lending. The average debt-to-equity ratio of Egyptian companies tracked by Bloomberg is about 45 percent, compared with 133 percent for Middle East and Africa companies. Loan growth was 4.4 percent in the first 11 months of 2011, set for the slowest annual growth since 2009, central bank data show.

Yields have dropped even as banks raise deposit rates to support the Egyptian pound, which has weakened 8.1 percent to 6.7379 a dollar yesterday since the central bank started rationing the U.S. currency on Dec. 30 to slow the pace of depletion of foreign reserves. National Bank of Egypt and Banque Misr SAE increased three-year deposit rates by as much as 200 basis points to 12.5 percent this month.

“Sooner or later, yields will go up on government debt because banks won’t like compressing their profit margins for long,” Moustafa Assal, managing director of Cairo-based Bondlink Advisory, which trades government debt, said by phone Feb. 21. “There are real doubts now on the ability of the government to secure an IMF agreement because of how the current political and economic crisis are being handled.”

For now, increased demand is pushing yields lower. Bids for all treasury-bill maturities were more than twice the amount offered this month, data compiled by Bloomberg show. The six- month T-bill yield has fallen 38 basis points in the past month to 13.34 percent.

“The market is driven by liquidity at the moment, not fundamentals,” El Bawab of EFG-Hermes said.

To contact the reporter on this story: 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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