Egypt Approaches JPMorgan, FGB as Bank Markets Local Debt

  • Call option being marketed to hedge foreign-exchange risk
  • Foreign-exchange shortage has stalled Egypt's economic growth

National Bank of Egypt officials met with banks in the United Arab Emirates, including JPMorgan Chase & Co., as the North Africa nation seeks to attract foreign investors to its local-currency debt market after the biggest one-time devaluation of the pound since 2003 last week.

Senior executives, including the bank’s treasurer, also met with First Gulf Bank and other investors to “explain” and market its product for hedging foreign-exchange risk aimed at overseas investors, NBE’s Chief Financial Officer Hussein Refaie said in an interview. The state-run lender plans to meet investors in other countries, he said, without giving details.

NBE has been offering dollar call options for up to a year to overseas investors buying Egyptian Treasury bills since March 14, the day the central bank devalued the pound by about 13 percent and promised a more flexible exchange rate. Authorities hope the product will help renew interest in the local debt market, after foreigners sold about $10 billion of notes since 2011.

The options are sold at a premium of about 4.75 percent for one-year contracts, according to state-run Banque Misr, which is also selling the product. They allow investors to buy back dollars at the same rate at which they were sold, effectively eliminating the risk resulting from further pound weakening. By also guaranteeing the ability to expatriate funds, they address the most common concerns cited by investors for avoiding local debt.

“We are explaining the product to investors and receiving feedback," Refaie said in a phone interview. “It’s too early to talk about finalized deals, but there is a lot of interest in the product."

Egypt’s central bank raised its key interest rate by 150 basis points on March 17, a move seen as an attempt to improve the pound’s appeal. Yields on Egyptian 1-year T-bills rose to 13.6 percent in the last auction before the increase, while T-bonds maturing in 2023 surged to 16.931 percent on Wednesday.

Yield on the 1-year T-bills, however, fall to about 6 percent after factoring in a 20 percent tax and the cost of the currency hedge. Even so, it remains an attractive investment versus returns offered elsewhere in the world, according to Amr Mostafa, NBE’s treasurer.

“Where would you get a safe, guaranteed 6 percent return in the world? Are the returns in other countries fully hedged?” Mostafa said in a phone interview from Abu Dhabi.

More inflows could help ease Egypt’s foreign-currency shortage, which has stalled economic growth and prompted an increase in the budget deficit. The country’s foreign reserves have been stable at about $16.5 billion since September, just enough to cover three months’ worth of imports.

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