Egypt’s local-currency borrowing costs surged the most in three months after Moody’s Investors Service cut ratings of local banks due to their exposure to government debt and the central bank raised interest rates.
Average yields on six-month and one-year treasury bills jumped 78 basis points, or 0.78 percentage point, at today’s auction to 13.81 percent and 14.46 percent, according to central bank data on Bloomberg. That’s the biggest increase since a sale of similar-maturity debt on Jan. 3. The Arab country raised 6.8 billion Egyptian pounds ($999 million), missing a 7 billion- pound target.
Deposit ratings of Egypt’s three biggest banks were cut to Caa1 at Moody’s this week because the government has “reduced capacity to support” them. National Bank of Egypt SAE, Banque Misr SAE and Banque Du Caire SAE hold government securities equal to 800 percent to 900 percent of their Tier 1 capital, Moody’s estimates show. Local banks bid for 2 times the amount of one-year bills offered today, down from 2.5 times last week.
“Demand is declining and forcing yields higher because the market is saturated with government debt as banks took on bigger positions throughout the quarter,” Amr Seif, chief dealer at Piraeus Bank Egypt, said by phone.
The Arab country’s borrowing costs have surged since Moody’s downgraded its sovereign rating on March 21 to the fifth-lowest junk score, citing political turmoil that’s stalled an International Monetary Fund loan and hindered the economic recovery. The yield on Egypt’s $1 billion of benchmark 5.75 percent dollar-denominated 2020 bonds has jumped 89 basis points since the decision to 8.33 percent as of 3:34 p.m. in Cairo.
The central bank’s move to raise its benchmark rates last week “naturally means higher inflation and higher yields,” Seif said. “For foreign banks like us, Egypt’s downgrade also reduces the amounts of government debt we can hold.”
The debt sold today will be issued April 2, the first step in a plan to raise 170 billion pounds during the second quarter. The pound weakened 0.1 percent to 6.8031 a dollar, taking this year’s depreciation to 6.4 percent, data compiled by Bloomberg show. The central bank sold $38.4 million at a currency auction today at a weighted average exchange rate of 6.7931.
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