Egyptian Credit Risk Falling to Lowest Since Protests
Egypt’s credit risk is falling to the lowest level since anti-government protests began two weeks ago and international borrowing costs are dropping as the nation’s biggest political crisis in three decades eases.
The cost of insuring Egyptian sovereign debt declined 6.5 basis points from yesterday’s London close, to 338.5 as of 9:50 a.m., the lowest level since Jan. 25, according to CMA prices. The yield on Egypt’s 5.75 percent bond due in April 2020 gained 11 basis points to 6.3 percent, down 89 basis points from a record high of 7.2 percent on Jan. 31, data compiled by Bloomberg show.
The government raised most of the 15 billion Egyptian pounds ($2.5 billion) sought at a debt auction yesterday as negotiations between opposition leaders and Vice President Omar Suleiman on constitutional changes needed to end the 30-year rule of President Hosni Mubarak made “big progress,” Egyptian billionaire Naguib Sawiris, a participant in the talks, said on Bloomberg Television.
“The market has digested the fact that things have changed and that the end result currently does not look calamitous,” said Oliver Bell, who helps oversee about $10 billion of emerging-market assets as a London-based senior investment manager at Pictet Asset Management. “It’s not as bad as everyone thought when the violence erupted, but I don’t think we can be certain that we know the outcome yet.”
Protests that began Jan. 25 in central Cairo have killed about 300 people, according to the United Nations. Demonstrations continued with thousands camping out in tents. The government vowed progress within a month toward free elections, a move aimed at persuading protesters to leave Tahrir Square.
The government carried out its first auction since Jan. 27 yesterday, selling a total 13 billion pounds of bills. Yields on the 91-day notes rose 147 basis points to 10.97 percent, the highest rate in two years. The yield is down from 14 percent in the aftermath of Lehman Brothers Holdings Inc.’s collapse in September 2008.
“It’s an opportunity because the yields have improved and we are very liquid,” National Bank of Egypt Chairman Tarek Amer said in a telephone interview yesterday from Cairo. The bank will continue to buy the government paper, he said.
The Egyptian pound fell 0.1 percent to 5.9600 against the U.S. dollar, the lowest since January 2005, after sinking 1.3 percent on Feb. 6. Local banks opened on Feb. 6 for the first time in more than a week.
The Ministry of Finance said the auction results underscored the strength of the local financial system.
“Results of the auction show that the risk premium has abated,” Samy Khallaf, adviser to the finance minister for public debt management, said in an e-mailed statement.
While the government raised most of what it sought, higher borrowing costs and a weakening currency are putting pressure on its efforts to reduce the budget deficit.
In an attempt to placate the protesters, Finance Minister Samir Radwan said on Feb. 5 that the government won’t reduce subsidies even if global prices of food and commodities rise. Public spending will be used as a tool to “achieve social justice,” he told a news conference in Cairo.
An increase in public spending may push the budget gap to “double digits” in 2011, compared with 8.1 percent in the fiscal year that ended in June, Standard & Poor’s said last week after lowering the country’s credit ratings by one level to two below investment grade. Fitch Ratings and Moody’s Investors Service also cut Egypt’s ratings.
Egypt’s five-year credit default swaps jumped 24 basis points on Jan. 25 when protests started to 327.7 and climbed as high as 421.3 on Jan. 31, according to CMA prices.
The contracts, which increase as perceptions of credit quality deteriorate, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company or government fail to adhere to its debt agreements.
The stock market said yesterday that it will open on Feb. 13, two weeks after closing. The benchmark EGX 30 Index slumped 16 percent in the week ended Jan. 27, the last day the bourse was open.
“The chances that things will work out well rather than badly in Egypt are pretty good, so I would be a buyer rather than a seller of Egypt,” Antoine van Agtmael, the chairman and chief investment officer at Emerging Markets Management LLC, said in a Bloomberg Television interview from Washington. Van Agtmael coined the term “emerging markets” in 1981.
London-listed global depositary receipts of Orascom Construction Industries, dropped 1.8 percent to $41.20 after surging 4 percent yesterday. The Cairo-based company said in a statement yesterday that it has resumed work on 90 percent of its sites in the Arab country. Orascom Telecom Holding SAE rose 0.3 percent to $3.30.
“Markets are reacting positively to the improvements in the security situation, the progress on the political dialogue, and recent central bank measures to ensure an orderly reopening of banks,” Alia Moubayed, a London-based economist at Barclays Capital, said in an e-mail. “The challenge is how to avoid this reversal in sentiment should political volatility return, by keeping up the pace of reforms and clear communication with markets.”
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