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Egypt Plans $1 Billion Eurobond Sale as Budget Gap Widens

Egypt's Finance Minister Samir Radwan
Egypt's Finance Minister Samir Radwan. Photographer: Nicholas Kamm/AFP/Getty Images

Egypt plans to raise $1 billion by selling Eurobonds this year to diversify borrowing and finance a widening budget deficit after its economy was rocked by the worst political crisis in 30 years.

The five-year bonds will be backed by a U.S. “sovereign guarantee,” Finance Minister Samir Radwan said by telephone from Cairo today. “We should tap the market quickly. We need to diversify because the local market is squeezed.”

Egypt’s budget gap may widen to the highest level in more than a decade in 2012 after a popular revolt ended the three-decade rule of President Hosni Mubarak, according to the Ministry of Finance. The turmoil prompted tourists to flee, lowered the country’s credit ratings and raised borrowing costs. President Barack Obama promised last week $2 billion in loan guarantees and debt forgiveness.

“The sale announcement is positive because will help the government bridge the gap in its finances as a result of the revolution,” said Wael Ziada, head of research at EFG-Hermes Holding SAE, Egypt’s biggest publicly traded investment bank. “The size is not significant but the backing from the U.S. will help raise the money at a relatively inexpensive cost.”

Yields Climb

The finance ministry hasn’t hired banks to manage the sale, Radwan said. The bonds will follow the issuance of $1.5 billion in Eurobonds in 2010, which included a $1 billion in 10-year bonds and $500 million in debt due to mature in 2040.

The yield on Egypt’s 5.75 percent dollar bond due April 2020 rose 2 basis points, or 0.02 percentage point, to 5.89 percent at 2:01 p.m. in Cairo. The rate plunged 33 basis points on May 19, the day of Obama’s aid announcement. The cost of insuring the country’s debt against default climbed 7 basis points to 332 today, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Saudi Arabia also pledged to give Egypt $4 billion in soft loans, deposits and grants, the state-run Saudi Press Agency reported on May 21. The Arab country is close to signing an agreement for a $2.2 billion soft loan from the World Bank, the Ministry of Finance said this month.

‘No Choice’

The planned Eurobond sale “may satisfy short-term financing needs but the American backing limits the ability of Egypt as an independent entity to ask for funds in the international market in the long term,” said Moustafa Assal, head of fixed income at Beltone Financial, a Cairo-based investment bank. “At the moment the aid is welcome because Egypt has no choice but to go to the international market to get the economy back on its feet.”

Egypt’s economic growth may slow to 1 percent this year, the International Monetary Fund said in April, the lowest level since 1992. The nation had its credit rating lowered to Ba3 at Moody’s Investors Service and to BB at Standard & Poor’s, the third- and second-highest non-investment grades.

The North African country had $35 billion in external debt at the end of 2010, according to data on the central bank’s website, making up 14.7 percent of gross domestic product. The government depends on the sale of treasury bills to finance the deficit, which may reach 11 percent of GDP in the fiscal year ending June 2012, according to finance ministry data.

The ministry has struggled to raise its targeted amounts at weekly auctions of t-bills since the uprising as yields soared. Yesterday it raised 2.825 billion pounds ($474 million) of the 5.5 billion pounds sought by selling three-month and nine-month notes. The average yield on the 252-day notes climbed to 12.869 percent, the highest since November 2008.

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