Egypt Plans Record $2.6 Billion Bill Sale as Bankers Predict Rising Yields
Egypt is seeking to raise as much as 15 billion Egyptian pounds ($2.6 billion) in a record sale of Treasury bills, with bankers predicting yields will rise as foreign investors avoid the auction in the wake of deadly anti- government protests.
Banks that opened yesterday for the first time in more than a week are demanding yields on three-month local-currency bills 150 basis points to 200 basis points more than at the last sale on Jan. 27, according to four of 15 primary dealers in Cairo. Local lenders have enough funds to buy all the debt, central bank Deputy Governor Hisham Ramez said in an interview today on Bloomberg Television.
“Banks are full of liquidity,” he said. The yields “will move up but not as high as people are expecting,” Ramez said.
A lack of international investor participation may further weaken the pound, which fell today to the lowest level since January 2005, according to UBS AG. Foreign investors, who hold no more than 8 percent of all Egyptian bills, sold $1.7 billion of their holdings yesterday, pushing up yields 50 basis points, or 0.5 percentage point, Ramez said.
“I don’t see the possibility of foreigners coming in and buying in this market any time soon,” said Bhanu Baweja, global head of emerging-market fixed-income and currency strategy at UBS in London. “Every day that passes the economy and the pound will pay the price.”
Protests to unseat President Hosni Mubarak that began Jan. 25 have left about 300 people dead, according to United Nations estimates. They also disrupted the government’s financing program as the central bank postponed the sale of 4 billion pounds planned for Jan. 30 after raising 2.5 billion pounds on Jan. 27. The average yields on the sale of 182-day bills jumped 40 basis points to a one-year high of 10.6 percent in the last sale, according to data compiled by Bloomberg.
The central bank is auctioning 8 billion pounds of 91-day bills, 5 billion pounds of 182-day bills and 2 billion pounds of 273-day bills, according to data compiled by Bloomberg.
The pound fell 0.2 percent at 1:02 p.m. in Dubai after sinking 1.3 percent against the dollar yesterday to 5.933, as banks opened for the first time in more than a week and hundreds of Egyptians queued outside to withdraw funds. The central bank guarantees all deposits, Governor Farouk El-Okdah said in an interview with state-run television on Feb. 5.
The pound may slump 20 percent in the “short term,” Credit Agricole CIB said in a report on Feb. 3. The currency’s three-month non-deliverable forwards rose to a record last week, suggesting the currency may fall more than 7 percent against the dollar.
“I am not concerned about the currency,” Ramez said.
The central bank moved 5 billion pounds of cash into the financial system, using military cargo planes to bring in the funds, El-Okdah said in the interview.
The yield on Egypt’s 5.75 percent bond due in April 2020 dropped 22 basis points to 6.37 percent at 10:14 a.m. in Cairo, according to data compiled by Bloomberg.
The cost of insuring Egypt’s debt for five years with credit-default swaps soared to 430 basis points on Jan. 28, the highest since April 2009. They closed at 380 on Feb. 4, CMA prices in London show. Egypt’s bourse has been closed since the end of trading on Jan. 27 and will remain shut until at least Feb. 8.
“Given where the hard currency denominated Eurobonds are trading I see little incentive to buy local T-bills, so I expect foreign demand to be anemic at best,” Ahmad Alanani, director of Middle East fixed-income sales at Dubai-based Exotix Ltd., said by e-mail yesterday. “I find it hard to believe that the central bank would come about an issue like this without gauging the capacity of the local banks to take it up.”
“The last thing they want is for an auction to fail,” Alanani said.
Opposition leaders have agreed after talks with Vice President Omar Suleiman to form a committee to study constitutional changes, according to a government statement yesterday. Among the opposition’s demands is for the government to ease current constitutional curbs that make it difficult for independent candidates to run for president.
“We have no idea when this conflict is going to be resolved and what new economic policies we’ll see, there’s very little incentive for foreigners to buy,” UBS’s Baweja said.
The protests in Egypt were inspired by a revolt in Tunisia that led to the ouster of President Zine El Abidine Ben Ali on Jan. 14. The Tunisian central bank will have “no problem” in repaying almost $800 million of bonds denominated in euros and yen maturing this year, Mohamed Salah Souilem, general manager of external finances for Banque Centrale de Tunisie SA, said in a faxed response to questions from Bloomberg News.
Egypt’s newly appointed Finance Minister Samir Radwan said in an interview on Feb. 4 that the most populous Arab country will honor all its debt obligations.
In an attempt to placate the protesters, Radwan said on Feb. 5 that the government won’t reduce subsidies even if global prices of food and commodities rise. Public spending will be used as a tool to “achieve social justice,” he told a news conference in Cairo.
An increase in public spending may push the budget gap to “double digits” in 2011, compared with 8.1 percent in the fiscal year that ended in June, Standard & Poor’s said last week after lowering the country’s credit ratings a notch to two levels below investment grades. Fitch Ratings and Moody’s Investors Service also cut Egypt’s ratings.
“The government fiscal balance is likely to deteriorate,” Baweja said. “Expenditure will increase. One of the reasons that people are on the streets is that food prices are quite high, so subsidies won’t be cut.”
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