Egypt Cancels First Debt Sale After S&P Cut as Pound Weakens
Egypt canceled the first debt sale after a rating cut at Standard & Poor’s raised borrowing costs and as Fitch Ratings warned against delaying an International Monetary Fund loan beyond January. The pound weakened the most in two weeks.
The country had planned to raise 6 billion Egyptian pounds ($969 million) at an auction of six-month and 12-month treasury bills three days after S&P cut Egypt to the same junk level as Greece and Pakistan. Since the Dec. 24 downgrade, the mid-yield on six-month bills on the secondary market jumped 42 basis points, or 0.42 percentage point, 13.53 percent, according to data compiled by Bloomberg. The Egyptian pound, subject to a managed float, fell 0.3 percent in the same period.
S&P cut Egypt to B-, six steps below investment grade, on concern escalating political instability will hinder the nation’s ability to restart the economy. The unrest led Egypt to ask the IMF to delay its decision on a $4.8 billion loan. Fitch would become “more concerned” about dwindling foreign reserves if the deal is delayed beyond January, it said today.
“The government was trying to set a ceiling of 14 percent on the one-year bills, which was unacceptable for investors because of the S&P credit rating cut,” Nour Mohei-El-Din, assistant general manager for treasury at BNP Paribas Egypt, said by phone.
On the secondary market, the one-year yield gained eight basis points to 13.64 percent in the past three days. The ministry and the central bank typically don’t announce reasons for debt-sale cancellations. Finance Ministry officials also weren’t available to comment when contacted by phone and e-mail.
Tension has heightened in the past month as President Mohamed Mursi, an Islamist politician, pushed ahead with a constitutional referendum despite concerns from groups such as the National Salvation Front, which includes Nobel Laureate Mohamed ElBaradei. Opponents argue the constitution, which passed with 64 percent of votes, fails to protect basic rights, a contention its supporters deny.
Egypt asked the IMF to delay its decision, originally slated for this month, until it can hold dialogue on planned tax increases linked to the initial deal reached in November. S&P warned that political rifts could hinder the broad consensus Egypt needs to implement an IMF program, rendering the program “inactive.”
Fitch, which rates Egypt four levels below investment grade at B+, views January as “a key month,” Richard Fox, London- based head of Middle East and Africa Sovereigns, said by phone. “The longer that program takes to be approved, then obviously the more fragile the external financing situation becomes,” he said. Foreign currency reserves have plunged almost 60 percent since the uprising that ousted President Hosni Mubarak.
The yield on the benchmark 5.75 percent dollar bonds due in April 2020 was little changed at 6 percent, bringing this year’s drop to 199 basis points. The pound has retreated 1.3 percent in December, taking its 2012 drop to 2.6 percent. It weakened 0.2 percent, the most since Dec. 13, to 6.1912 a dollar at the close in Cairo.
“It’s natural for investors to demand higher returns after S&P’s rating downgrade,” Sherif Othman, Cairo-based head of treasury at Arab Banking Corp., said by phone before the auction was canceled. “The dispute between the government and opposition in the absence of dialogue isn’t an encouraging sign for anyone.”
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