Egyptian Prime Minister Hisham Qandil wants to boost private investment, cut subsidies and sell debt to revive the economy, policies that he may find easier to implement than his predecessors.
Qandil, who was sworn in last month, said in an interview in Cairo yesterday that his government wants to attract private companies to invest in energy exploration and power distribution. It also wants to sell sukuk, or Islamic bonds, after legislation for the debt instrument is prepared within the next three months, to lower near-record borrowing costs.
Qandil stands a better chance of implementing such policies than governments under ousted President Hosni Mubarak because he was appointed by a democratically elected president, Cairo-based investment banks EFG-Hermes Holding (HRHO) and CI Capital Holding said. Egypt is struggling to rebuild its economy after more than 19 months of political unrest that saw borrowing costs jump by about 50 percent and foreign reserves drop by more than half.
“This government may have more credibility to implement difficult reforms,” Wael Ziada, head of research at EFG-Hermes, said by phone. “Mubarak-era governments, from an economic standpoint, implemented solid structural reforms, but they failed to address critical socio-economic issues and make sure wealth trickled down. This government has to avoid making those mistakes to make sure Egypt is put on the path of sustainable economic development.”
Egypt restarted talks for a loan of up to $4.8 billion from the International Monetary Fund, negotiations Qandil said he expects to be completed by the end of November. The government’s plan calls for reducing the budget deficit to 7.6 percent of economic output in the year that ends in June. The IMF, which says it requires broad political consensus for a deal, estimates the figure reached 10 percent last fiscal year, making it the highest in the Middle East.
The deficit has been widening as economic growth slows. Egypt is targeting 4 percent to 4.5 percent growth in the fiscal year that ends in June, Qandil said. The economy grew 2.2 percent in the past fiscal year, Finance Minister Momtaz el- Saieed said in an interview late yesterday.
“They have no options but to make changes, cut the deficit and open the economy in order to obtain vital IMF funding,” Alia Mamdouh, Cairo-based economist at CI Capital, said by phone. “People have more awareness now of the change that needs to be made. Also the perception is that the government is fighting corruption, but it will not be an easy task.”
A sukuk issuance would mark Egypt’s first use of Islamic bonds. Global sales of bonds that comply with Islam’s ban on interest have soared 86 percent so far this year to $35 billion, according to data compiled by Bloomberg.
The average yield on global sukuk dropped 99 basis points this year to a record 3 percent on Sept. 7, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index.
“This is something we want to do to enlarge the engagement” of investors who “want to use this tool but are currently unable to,” Qandil said yesterday. After the legislation is prepared, “I hope they will be ready with one or two issuances,” he said, referring to the Finance Ministry.
The premium investors demand to hold Egypt’s dollar- denominated debt has plunged 208 basis points, or 2.08 percentage points, to 418 basis points since Mohamed Mursi was declared the country’s first freely elected president on June 24, according to JPMorgan Chase & Co.’s EMBIG Egypt Sovereign Spread Index. That compares with an eight-basis point increase for the Middle East average.
The benchmark EGX 30 Index (EGX30) has been the world’s second-best performer this year, having gained 55 percent. Still, the government has to make more progress on laying out an economic plan, said Angus Blair, chairman of Cairo-based Signet Institute, a group that studies business and politics in the Middle East and North Africa.
“The government has to move quickly as the clock is ticking,” Blair said by phone.
Egypt, which relies on selling domestic debt to fund the budget deficit, saw its nine-month treasury-bill yield fall the most yesterday in almost two years after Qandil said the government will continue “proper management of the pound.”
Foreign investors including Silk Invest Ltd. and Union Investment Privatfonds have refrained from buying Egyptian local-currency debt, partly on concern the country may devalue the pound as foreign reserves were depleted amid unrest.
“For those businessmen that are waiting for the pound to devalue before getting into the market, they can get into the market now,” Qandil said.
The pound, subject to a managed float, has lost less than 5 percent since January 2011, outperforming the currencies of other emerging markets such as India and South Africa. The currency strengthened for a fourth day, gaining less than 0.1 percent to 6.0883 per dollar at 3:56 p.m. in Cairo. Its four-day gain of 0.3 percent is the best in almost a year.
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