Easing Egypt Debt Risk Shows Investors Favor El-Sisi VictoryAhmed A. Namatalla
To gauge how Field Marshal Abdel-Fattah El-Sisi’s likely victory in this week’s Egyptian presidential election is winning over investors, look no further than the country’s creditworthiness.
The cost of insuring the nation’s debt for five years fell nine basis points to 339 as of 7 p.m. in Cairo, within five basis points of an almost three-year low on May 12, according to data provider CMA. That puts it at about half its level in the run-up to the 2012 presidential race, in which the Islamist Mohamed Mursi beat 12 contenders into office.
Since Mursi was ousted July 3, the military-backed interim government has attracted billions of dollars in aid from the Persian Gulf and has promised reforms to cut the Middle East’s highest budget deficit and boost investment. Egypt’s default-swap contracts, now priced at about half for those of similarly-rated Pakistan, may signal improving investor sentiment and better prospects for the most populous Arab state to tap international capital markets.
“Investors view an El-Sisi win as a near certainty that would bring about more stability in Egypt and, going forward, this can generate some sort of economic resurgence,” Farouk Soussa, London-based chief Middle East economist at Citigroup Global Markets Ltd., said by phone May 22. “The way they see Egypt is that it’s going to give you a decent return and is less likely now to blow up in your face.”
The yield on the government’s 5.75 percent Eurobonds due in April 2020 was little changed at 4.97 percent, the lowest on a closing basis since December 2010, data compiled by Bloomberg show.
The benchmark EGX 30 Index of stocks slipped 0.3 percent yesterday from an almost six-year high, paring gains in the past six months to 40 percent, the best performing equity gauge worldwide after Dubai, the data show. The stock market was closed today for a public holiday announced by the government last night to encourage people to vote.
Officials extended voting for a third day, amid indications of a low turnout. The vote will conclude tomorrow, the state-run Ahram Gate website said, citing the election commission. Broadcasters and religious leaders have been urging people to go to the polls, and state television reminded Egyptians that there’s a 500 Egyptian pound penalty for those who don’t.
The official result will be announced by June 5, Nile News reported today.
Egypt’s economy will probably grow 2.5 percent this year, up from 2.1 percent in 2013, according the median estimate in a Bloomberg survey of economists. Saudi Arabia, the United Arab Emirates and Kuwait have pledged about $15 billion in aid.
“Aid inflows from the Gulf have substantially improved Egypt’s debt fundamentals, as have the ever more convincing signs that a new political order is finally coalescing,” Simon Williams, chief economist for the Middle East and North Africa at HSBC Holdings Plc in Dubai, said by phone yesterday. “Should that be reversed, that will necessarily reflect on the country’s credit fundamentals.”
The interim military-backed government forecast the budget deficit will drop to 12 percent of economic output for the fiscal year ending in June, down from 14 percent last year, Finance Ministry Hany Kadry said in March.
Standard & Poor’s affirmed its B- rating, six steps below investment grade, and stable outlook for Egypt May 16, saying official donors will continue to provide the government sufficient funds to manage short-term and external funding needs.
While Egyptian bonds have gained and the cost of protecting against default has fallen, the country’s securities maturing in 2020 and 2040 and its default swaps are among the least liquid in the Middle East, HSBC’s Williams said.
Foreign investors held less than 400 million pounds of ($56 million) local-currency T-bills as of February, from more than 59 billion pounds at the end of 2010 before the outbreak of protests that toppled former President Hosni Mubarak the following year, data from the central bank show.
The extra yield investors demand to own Egypt’s dollar debt rather than U.S. Treasuries dropped five basis points to 349 on May 22, the lowest level since August 2011, according to JPMorgan Chase & Co. indexes. Egypt’s dollar bonds have returned 14 percent this year, compared with a 7.3 percent average gain for developing nations worldwide, according to data compiled by Bloomberg.
While declining yields and narrowing spreads may not signal confidence in the government’s ability to implement economic reforms, it does show investors are increasingly interested in the market, according to Citigroup’s Soussa.
“This is just a sign that Egypt isn’t a complete basket case anymore,” he said. “It’s investable.”
(An earlier version of this story corrected bond returns in the 12th paragraph.)