Unrest Roils Egypt as Army Deadline Moves Markets: Arab Credit

Egypt’s 2020 bonds are yielding more than securities due 20 years later after a record slump in June as protests add to the deepening polarization hindering the country’s economic recovery.

The yield on the Arab nation’s $1 billion of 5.75 percent bonds fell five basis points to 10.24 percent at 10:31 a.m. in Cairo, compared with 10.03 percent for 2040 debt, after the army gave President Mohamed Mursi 48 hours yesterday to respond to protesters’ demands and end an impasse. Egypt’s benchmark EGX30 index of stocks gained 1.2 percent to a three-week high.

The biggest demonstrations since the 2011 revolt that ousted Hosni Mubarak amplified a crisis that led to two credit-rating cuts this year to Caa1, the fifth-lowest junk score at Moody’s Investors Service. Hundreds of thousands of protesters called on President Mohamed Mursi to resign on the first anniversary of his inauguration, while his supporters vowed to protect Egypt’s first democraticallyl chosen civilian leader.

“If you’re on the outside at the moment, the optimistic scenario is hard to paint convincingly,” Gabriel Sterne, a fixed-income economist at Exotix Holdings Ltd. in London, said by phone yesterday. “Investors are looking for urgent economic reforms and it doesn’t look like that’s going to get done amid these political divisions.”

The 2020 yield jumped 14 basis points yesterday, extending a 211 basis-point increase in June. That compares with an 84 basis point gain for Middle East sovereign debt on HSBC/Nasdaq Dubai indexes.

Debt Pile

Financing pressures are pronounced as the country has about

1.4 trillion pounds ($199 billion) of domestic debt and another $39 billion of external debt outstanding, according to Finance Ministry data. Combined, the liabilities represent about 94 percent of economic output. The nation’s default risk soared 261 basis points last month, according to data provider CMA, before trading at a record 901 today.

Last month’s advance was four times bigger than that on Middle East contracts, which rose by an average 64 basis points to 331 on June 28, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The surge took Egypt’s five-year credit default swaps above those of similarly rated Pakistan.

Crowds gathered outside the presidential palace and in Tahrir Square last night to demand early presidential elections, with some celebrating the military ultimatum by dancing, flashing victory signs and cheering as helicopters buzzed overhead. Mursi wasn’t consulted and didn’t approve the military’s statement, his office said.

No Buyers

The government, which said this year it planned to sell its first Islamic bonds as early as last month, “won’t find anyone to buy them,” Souheir Asba, a frontier markets strategist at Societe Generale SA, said by phone from London yesterday.

The ministers of foreign affairs, tourism, environment, communications and state minister for parliamentary affairs have submitted resignations, state-run Ahram Gate reported.

Some investors have taken the rout in Egyptian assets as an opportunity to buy. The benchmark EGX 30 Index of stocks has rallied in the past five trading days. The index’s 13 percent retreat in June, the steepest since November, left stocks trading at 1.2 times net assets compared with 1.4 times for the MSCI Emerging Markets Index.

Political Stalemate

Even if protesters compel Mursi to step down, the transition could “serve to make Islamists more militant,” while his refusal to resign risks stoking confrontations, Raza Agha, chief Middle East and Africa economist at VTB Capital Plc in London, said in an e-mailed report yesterday.

The government’s debt predicament is more precarious on the local-currency side, with repayments this quarter set to jump 20 percent from a year earlier to a record 169 billion pounds, data compiled by Bloomberg show. Political unrest curbed demand for notes in the past month, with bids for nine-month treasury bills falling to a record low at the last sale as the yield climbed 11 basis points to 14.99 percent.

Egypt’s economy probably grew 2.1 percent in the fiscal year ended June 30, near the slowest pace in two decades, according to the median estimate of 17 analysts compiled by Bloomberg.

On the external debt side, yields on 2020 securities are likely to continue exceeding the 2040s, according to Exotix’s Sterne, who said this is “typical of highly distressed bonds.” Egypt’s economic situation worsened this year as political wrangling impeded the nation’s talks with the International Monetary Fund for a $4.8 billion loan.

“Once yields hit 10 it was almost inevitable that the spread between the 2020 and 2040s would disappear,” Sterne said. “You got a whole bunch of people thinking it’s probably going to get worse before it gets better.”

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