Egypt starts presidential elections today with its debt-risk premium almost double the level when Hosni Mubarak was ousted, evidence that investors doubt the vote alone can pull the country out of an economic slump.
The extra yield investors demand to hold Egyptian debt over U.S. Treasuries rose 94 basis points this quarter to 583 on May 21, outpacing a 57 basis-point gain in the Middle East spread, JPMorgan Chase & Co. data show. The rate was 299 on Feb. 10, 2011, the day before Mubarak’s three-decade rule came to an end.
Investors may avoid Egyptian assets until the nation secures a $3.2 billion loan it’s seeking from the International Monetary Fund to shore up public finances and the new president’s powers are clearly defined said analysts, including Michael Cirami of Eaton Vance Corp. (EV) With opinion polls showing none of the 13 candidates commanding a clear lead, results may not be known before June 21, following a second round of voting.
“There is a lot that we need to see happening to put Egypt on a positive course,” Richard Fox, London-based head of Middle East and Africa sovereign ratings at Fitch Ratings Ltd., said by phone on May 21. “The hope is that there will be an IMF agreement that will be a catalyst for more external support.”
Foreign investors dumped Egyptian assets last year amid political upheaval in the country of 80 million, leaving local banks to bear the burden of helping the government finance its budget deficit.
The government forecasts the budget gap will exceed 9 percent of gross domestic product for a second fiscal year, making it the highest in the Middle East, according to IMF forecasts.
The country’s foreign-currency debt spread over U.S. Treasuries is near a four-month high and is 127 basis points above the Middle East average spread of 456 on May 21.
“A spread of almost 600 is relatively high when you compare it with other countries around the world, but when you think about the specific risks related to Egypt, there seems to be a lot of downside risk ahead,” Cirami, who helps manage $12 billion at Boston-based Eaton Vance, said by phone May 21. Eaton Vance sold the last of its Egyptian government-security holdings in early 2011, he said.
Investors from abroad cut their holdings of treasury bills to 1.6 billion pounds ($265 million) in February from 59.4 billion at the end of 2010, central bank data show.
The retreat helped drive local-currency borrowing costs to a record 15.19 percent at an auction of six-month treasury bills last week, according to central bank data. Similar securities pay 0.46 percent in Saudi Arabia and 4.69 percent in Greece.
Egypt has been waiting for foreign aid to arrive to stem a fall in foreign reserves, which tumbled almost 60 percent since before the uprising. The country officially requested the IMF loan in January after the ruling military council rejected a similar deal last summer.
Former Arab League chief Amre Moussa, who served as foreign minister in the 1990s under Mubarak, is frontrunner in the presidential race, according to the latest weekly survey by the semi-official Ahram Center for Strategic and Political Studies.
Other polls have given the lead to Abdel-Moneim Aboul- Fotouh, a moderate Islamist, or to Ahmed Shafik, who briefly served as Mubarak’s last premier. With no candidate scoring above 50 percent in any poll, the winner may be decided in a run-off in mid-June.
The new president will be in charge of a country whose credit rating was cut by Moody’s Investors Service four times since the start of 2011 to B2, five levels below investment grade.
Economic growth slowed to less than 1 percent in the final quarter of 2011 as tourist visits, which were Egypt’s second- biggest source of hard currency before the uprising, slumped, official data show. Unemployment in the country, where more than one in five people live below the poverty line according the United Nations, was 12.6 percent at the end of March, the statistics office said this month.
The economy is improving. GDP growth accelerated to 5.2 percent in the first three months of 2012, compared with a 4.3 percent contraction a year earlier, Planning Minister Fayza Aboulnaga said on May 21. Tourist visits rose 32 percent over the period, according to tourism ministry data last month.
‘Pockets’ of Value
After the growth data were published, the cost of protecting Egyptian debt for five years against non-payment tumbled 20 basis points yesterday to 623, according to data provider CMA. The contracts pay the buyer face value if a borrower fails to meet its obligations. Egypt also signed an agreement this week to sell $500 million of treasury bonds to Saudi Arabia in June, and the Persian Gulf country deposited $1 billion in Egypt’s central bank.
“There is still value in the Egyptian market, but in pockets rather than across the board,” London-based Sven Richter, managing director and head of frontier markets at Renaissance Asset Managers, which oversees more than $2 billion, said in a May 17 e-mail in response to questions.
Egypt’s benchmark EGX30 Index (EGX30) has surged 34 percent this year, the world’s second-best performer among 96 indexes tracked by Bloomberg. “Elections are a risk for the short term as they can lead to instability, but in the long term they are necessary to provide the country with a stable government that can move ahead to grow the economy,” Richter said.
The nation’s credit default swaps are still the highest in the Middle East and among the top-10 riskiest credits in the world, according to CMA, which is owned by CME Group and compiles prices from the privately negotiated market.
What the country needs after elections is clarity on the parliament’s status, a constitution-drafting process with broad support and economic policies that “make sense and are geared toward improving the fiscal position of the country and productivity,” said Eaton Vance’s Cirami. “International financial support without coherent policy isn’t enough to create a best-case scenario.”
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