Egypt’s success in selling two-year debt for the first time since February’s popular revolt may encourage foreign investors to buy shorter-term securities ahead of parliamentary elections in the fourth quarter.
The Ministry of Finance raised all 3 billion pounds ($503 million) it sought yesterday, selling bonds with a coupon of 13.10 percent, lower than the 13.25 percent median estimate of seven analysts surveyed by Bloomberg. The government also sold 2 billion pounds in three-month bills, as average yields fell 18 basis points to 11.76 percent, central bank data showed.
“Despite the uncertainty of what’s been happening in central Cairo, the bond markets have actually been pretty resilient,” said John Bates, the head of fixed income at London-based Silk Invest Ltd, referring to resurgent protests in the capital. “All in all, we’re reasonably positive on the long-term picture for Egyptian bonds.”
Demand from international investors may help Egypt reduce borrowing costs that climbed to the highest level since 2008 after the revolt ousted President Hosni Mubarak in February, according to EFG-Hermes Holding SAE, a Cairo-based investment bank. The extra yield investors demand to hold Egypt’s debt over U.S. Treasuries fell four basis points, or 0.04 percentage point, to 310 yesterday according to JPMorgan Chase & Co.’s EMBI Global index. Middle Eastern debt yields on average declined three basis points to 339, the data show.
Foreign investors sold 34.7 billion pounds of Treasury bills in the first four months this year, according to central bank data. The sales left local lenders to finance the country’s budget deficit. The government forecasts the gap will narrow to 8.6 percent of gross domestic product in the fiscal year that started this month, from an estimated 9.5 percent in the previous fiscal year.
Anti-government protests demanding faster political change and a possible “currency risk” may still deter foreign investors from re-entering the market before the elections, Moustafa Assal, the Cairo-based head of fixed income at investment bank Beltone Financial Holding SAE, said. Non- deliverable forwards for the pound rose to 6.62 per dollar this month, reflecting an expected 10 percent decline in the currency’s value.
“To the foreigners, it’s not just the issue of political instability, but also collecting back their dollars,” Assal said.
A clash over the weekend between supporters of the military council and protesters demanding the release of political prisoners and speedy trials of Mubarak and his officials left more than 300 people injured. Egypt’s default risk surged five basis points yesterday to 332, according to data provider CMA which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The contracts fell to 330 basis points today, according to CMA.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.
The Egyptian pound, down 2.6 percent this year, was little changed over the past month at 5.9574 against the dollar as the decline in the country’s international reserves slowed. The currency’s performance as well as the “flatness of the yield curve” on the government’s debt securities, “helps to make shorter duration paper more attractive,” said Ashok Parameswaran, senior emerging markets analyst at Invesco Inc. in New York.
“From an investor perspective I would prefer to be at the short end as I think the risk-reward trade off is more favorable,” Gabriel Stern, a London-based senior economist at Exotix Ltd, who rated the three-month and six-month securities a “buy” on July 11, said yesterday by e-mail. “Risks are more likely to materialize after the elections and if the new government bows to public pressure to raise spending.”
Yields on government bills dropped after the central bank canceled the first auction of the fiscal year when investors demanded returns it deemed too high.
The yield on Egypt’s 5.75 percent 10-year dollar bond maturing in April 2020 retreated five basis points today to 5.56 percent, according to Bloomberg prices, the lowest level since Jan. 14, the day when Tunisian President Zine El Abidine Ben Ali fled his country after a popular uprising, triggering Egypt’s revolt 11 days later.
The average yield on Middle East sovereign bonds declined seven basis points last week to 4.93 percent, according to the HSBC/NASDAQ Dubai Middle East Conventional Sovereign US Dollar Bond Index.
Slowing economic expansion is prompting banks to buy government debt to deploy their deposits, Beltone’s Assal said in a telephone interview yesterday. “Demand for loans is very low so they have nowhere to invest but T-bills and the interbank market,” Assal said.
The Ministry of Finance plans to raise 11 billion pounds from treasury-bill sales through July 31, according to central bank data on Bloomberg. The ministry aims to sell 6 billion pounds from the sale of six-month and one-year securities on July 28 and five billion pounds of three-month and nine-month notes three days later, the data show.
Growth may slow to 1.6 percent this fiscal year from an estimated 2.6 percent in the previous year, according to a Bloomberg survey this month. The government is forecasting an acceleration of 3.2 percent
The ratio of loans to deposits at Egyptian banks was 50 percent at the end of the first quarter, according to central bank data, compared with 93 percent in the United Arab Emirates, home to 7 percent of the world’s proven oil reserves. Local- currency deposits rose 0.8 percent in May to 648.6 billion pounds, central bank data show.
Yesterday’s sale shows that domestic investors are betting on a stable transition of power from the ruling military council to an elected government, said Khalil El Bawab, the Cairo-based director of fixed income at EFG-Hermes.
“We’re betting that things might get better from where we are standing,” he said yesterday. “There’s ample liquidity in the market and players are betting that these levels won’t be seen again, so investors are locking in high yields.”
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