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Egypt Biggest Yield Drop Since Revolt Signals Longer-Term Sales

The biggest drop in Egypt’s borrowing costs since the start of protests that toppled former President Hosni Mubarak last year is fuelling speculation the government will sell longer-term debt to meet financing needs.

The average yield on one-year Treasury bills fell 15 basis, the most since January 2011, to 15.768 percent in an auction of 3.5 billion pounds ($580 million) of notes yesterday, according to central bank data on Bloomberg. Yields that had climbed to a record 16 percent last year fell yesterday after the central bank allowed lenders to free up more funds.

A lack of demand forced the government to cut the average maturity of its local debt to 1.3 years at the end of last year from 1.7 years in December 2010, according to Finance Ministry data. Egypt’s banks bore the brunt of government financing after foreign investors dumped local securities following the uprising that ousted Mubarak, while four credit rating cuts by Moody’s Investors Service effectively shut the country out of global bond markets.

“There is a lot of liquidity in the market now and this could encourage the government to issue” longer-term maturities, Moustafa Assal, the head of fixed income at Cairo-based investment bank Beltone Financial Holding, said by phone. “There is a window of opportunity. For how long? I don’t know.”

Public banks increased their holdings of treasury bills last year by 34 percent to 100.7 billion pounds, according to the most recent central bank data. Foreign investors reduced theirs by 51.5 billion pounds.

A potential loan program with the International Monetary Fund that the government requested in January needs “broad political support,” David Hawley, a spokesman for the lender, said yesterday in Washington.

IMF Talks

The government and political parties are holding talks with the IMF about a $3.2 billion loan to reduce borrowing costs and stem the decline in the country’s foreign-currency reserves, which plunged more than 50 percent since the uprising to $15.7 billion in February.

Talks with the IMF along with the inauguration of the first post-Mubarak parliament helped push the yield on Egypt’s 5.75 percent dollar bonds due April 2020 down 160 basis points this year to 6.39 percent at 5:04 p.m. in Cairo yesterday, according to data compiled by Bloomberg. The risk premium investors demand to hold Egyptian debt instead of U.S. Treasuries plunged 143 basis points this year to 464 on March 21, JPMorgan Chase & Co. data show.

‘Far Higher’

While local yields are falling, “the government funding costs are far higher than they were before the revolution,” Simon Williams, the Dubai-based chief economist for the Middle East and North Africa at HSBC Holdings Plc, said by phone. Yields “may come off a little but until a deal is reached with the IMF and other multilateral agencies and there is further progress with the political transition, the cost of debt is going to stay high,” he said.

Egypt is rated B at Standard & Poor’s, five levels below investment grade. The yield on one-year treasury bills at similarly-rated Lebanon is 5.33 percent, according to central bank data on Bloomberg.

The central bank cut the required reserve ratio on local-currency deposits by two percentage points on March 20 to 12 percent. The government priced the sale of 2.95 billion pounds in six-month bills yesterday at average yields of 14.799 percent.

“The reduction in borrowing costs is very helpful in terms of fiscal sustainability,” Gabriel Sterne, an economist at investment bank Exotix Holdings Ltd. in London, said by e-mail yesterday. “And indeed it’s symptomatic of confidence starting to return, which is of more help generally.”

Credit Conditions

The central bank said its decision to cut the required reserve ratio for banks was to provide “liquidity into the banking system and help ease credit conditions in the market.” It kept its benchmark overnight interest rate unchanged yesterday at 9.25 percent. Policy makers had raised the rate by 1 percentage point in November as depositors shifted funds to dollars instead of pounds.

Deposits in foreign currencies have increased 15 percent since the start of the revolt last year to the equivalent of 184.6 billion pounds in January, according to the most recent central bank data. Pound-denominated deposits for the period were little changed in the same period.

The reserve ratio cut would help release about 9 billion pounds to the banking system, Bank of America Merill Lynch analysts Munir Shahin and Jean-Michel Saliba wrote in a report released yesterday.

“The move should help unlock domestic liquidity and moderately ease T-bill yields, while also decreasing the Egyptian-pound funding costs for the banks and encouraging them to attract Egyptian-pound deposits,” they wrote.

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