Egypt Pre-Election Bond Sale Seeks to Lock in Rate: Arab Credit

Egypt’s first bond sale since the popular uprising that ousted its president in February may help cushion the country against higher borrowing costs after the year-end elections should political instability persist.

The most populous Arab country will auction two-year bonds valued at 3 billion Egyptian pounds ($504 million) on July 25, the first issuance since Jan. 18. The notes may yield 13.25 percent, according to the median estimate of seven analysts and investors surveyed by Bloomberg. The average yield at a sale of one-year treasury bills today was 12.781 percent.

“The government could be trying to hedge its position in case the elections don’t provide the expected stability,” Nour Mohei-el-Din, assistant general manager for treasury at BNP Paribas Egypt, said in a telephone interview yesterday. “It’s locking in a rate that may be lower than that of future sales should borrowing costs increase after the elections.”

Egypt’s Finance Ministry has canceled sales of 19.5 billion pounds in treasury bonds ranging in maturity from three years to seven years amid the worst political crisis in three decades. The country’s reliance on short-term debt sales caused treasury-bill yields to surge to the highest levels since 2008.

Protesters Return

Next week’s sale is the first of planned auctions for a combined 22 billion pounds in two-year fixed-rate, two-year floating-rate and three-year bonds this quarter. The amount represents 15 percent of the government’s fund-raising plan for the period, with the rest coming via sales of treasury bills, according to the Finance Ministry. That compares with 19 percent in the same quarter last year.

Yields on Egyptian t-bills declined today for a fifth auction. The government met its target of raising 5 billion pounds.

Protesters have returned to the streets in Cairo and other cities to demand faster political and economic changes, and speedy trials of government officials that served under President Hosni Mubarak for alleged corruption and the killing of protesters in the uprising. The ruling military council this month delayed parliamentary elections to October or November from September.

Egypt’s local-currency borrowing costs surged since the start of the revolt, with the yield on one-year T-bills climbing 239 basis points, or 2.39 percentage points, to a 31-month peak of 12.98 percent at an auction on June 23. The central bank canceled a sale of similar-maturity bills the following week because investors demanded yields it deemed too high. Bidders accepted lower rates at the two auctions since.

Local Lenders

The extra yield investors demand to hold Egyptian debt over U.S. Treasuries rose 28 basis points, or 0.28 percentage point, this month to 317, according to JPMorgan Chase & Co.’s Global Emerging-Market Index. Middle Eastern debt yields on average rose 14 basis points to 346, the data show.

Foreign investors sold 34.7 billion pounds of T-bills in the first four months of the year, according to the most recent central bank data, leaving local lenders to finance the country’s weekly borrowing.

The average yield on Egypt’s three-month securities surged 244 basis points to 11.934 percent since the start of the revolt. The yield on similar securities sold on July 18 by Bahrain, the Arab country that needed the help of Saudi Arabian troops to end an uprising, was 0.67 percent.

Keep ‘Foreigners Away’

The cost of protecting Egyptian government debt against default for five-years rose 17 basis points this month 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. That compares with 182 for Tunisia, the other North African country whose president was overthrown by popular uprising.

“The uncertainty around the politics and short and medium-term disturbances may keep foreigners away” from next week’s issuance, Anthony Simond, emerging markets investment analyst at London-based Aberdeen Asset Management Plc, said by phone July 19. “Even pre-revolution, foreigners were still mostly buying T-bills because the bonds were not liquid enough.”

Prime Minister Essam Sharaf this week changed about a dozen members of his Cabinet to quell the biggest protests across the country since those that called for the ouster of Mubarak. The changes included replacing Finance Minister Samir Radwan, criticized for his ties to Mubarak’s former ruling party, with Hazem El Beblawi, an economist who works as an adviser for the Arab Monetary Fund in the United Arab Emirates.

‘Power Vacuum’

“Political events are taking the front seat in Egypt and that’s what will determine the pricing on the issuance,” said Rami Sidani, the Dubai-based head of Middle East and North Africa investment at Schroder Investment Management Ltd., which oversees about $230 billion worldwide. “It’s a question of how long the power vacuum will last,” he said July 19.

Changes to the Cabinet, broadcasting of trials of some former government officials and purging the police force of 669 officers, including some accused of violence against protesters, have failed to end a sit-in in Tahrir Square that has continued for almost two weeks.

The yield on Egypt’s 5.75 percent 10-year dollar bond due April 2020 fell 2 basis points to 5.61 percent at 2:10 p.m. in Cairo, down from a six-week high of 5.78 percent on July 14, before Sharaf’s Cabinet was reshuffled. Twelve-month non-deliverable forwards for the pound rose to 6.62 per dollar this month, reflecting an expected 10 percent decline in currency’s value.

The bond sale “is a gamble, but they had to come back to the market at some point, especially the local bond market,” Moustafa Assal, head of fixed-income at Cairo-based Beltone Financial Holding SAE, said July 19 by phone. “The political instability is part of life now and it will be for the foreseeable future, so the state has to make the necessary adjustments to sell the debt it needs.”

Slowing Growth

Economic growth may slow to 2 percent in the next 12 to 18 months, because of the decline in foreign investment and tourism, Moody’s Investors Service said in April. Growth may be 1.6 percent in the fiscal year that started this month, according to the median estimate of 10 economists surveyed by Bloomberg. That compares with the government’s forecast of 3.2 percent compared with the previous fiscal year’s 2.6 percent. Prior governments had said 7 percent is needed to keep joblessness from rising.

Fitch Ratings cut Egypt’s credit worthiness one level, to BB, on Feb. 3, leaving it two levels below investment grade. Moody’s said in June the “political environment” was the main source of uncertainty. It lowered its rating of Egypt twice this year to Ba3, three levels below investment grade.

“The instability has and will continue to increase the risk premium for Egypt,” said BNP’s Mohei-el-Din. “The longer elections are held off, the longer foreign investors will be delayed from returning and the higher the likelihood rates will go up in the future.”

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