El-Sisi Guest List Eclipsing Weak S&P Upgrade ProspectsAhmed A. Namatalla
Bondholders are signaling confidence in Egypt’s army chief-turned president as Arab nations rally to his support, even as Standard & Poor’s says it will maintain the country’s near record-low rating.
The yield on the nation’s benchmark April 2020 Eurobonds fell to 4.74 percent yesterday, the lowest since December 2010, before adding one basis point as of 3:32 p.m. in Cairo. That takes its decline to 45 basis points since the start of Egypt’s presidential election on May 15, compared with a 23 basis-point retreat in the same period to 5.54 percent for the average of Middle East sovereign debt, JPMorgan Chase & Co. indexes show.
Abdel-Fattah El-Sisi, sworn in as president June 8 at a ceremony attended by guests including the crown princes of Saudi Arabia and Abu Dhabi, vowed to restore security and fix an economy stuck in its worst slump since the early 1990s. S&P, by contrast, will probably keep Egypt’s rating six levels below investment grade for the coming year because of the political polarization, Trevor Cullinan, director of sovereign ratings, said last week.
“We can expect yields to drop even further, especially after the international presence at the inauguration,” Khalil El Bawab, head of fixed income at Cairo-based EFG-Hermes Holding SAE, said by phone yesterday. “This shows the new president not only has popular backing, but the support of neighboring governments, which is crucial.”
Egypt’s five-year credit default swaps, which insure debt against non-payment, were at 298 basis points today, the lowest since June 2011, according to data provider CMA. Nations in the Gulf Cooperation Council have already pledged $15 billion since the military seized power in July. Saudi Arabia’s King Abdullah last week called for a donor conference to benefit the most populous Arab country.
Egypt is rated the same as Venezuela and Pakistan at B-, the third-worst among all countries covered by S&P, according to data compiled by Bloomberg. Prospects of further financial aid have been factored into the current rating, according to Cullinan.
“If we see a significant reduction in domestic conflict and violence, that would be over and above our base case and that could lead to a positive ratings change,” he said by phone from Dubai on June 4. A sustained increase in international reserves would be a “supportive factor,” he said.
In a televised address after taking office, El-Sisi said there will be no reconciliation with those who resorted to violence. The government has blamed ousted President Mohamed Mursi’s Muslim Brotherhood for attacks on police and military forces, classifying it as a terrorist organization. The group, hundreds of whose supporters have been killed and jailed in a crackdown following Mursi’s overthrow, says it’s committed to peaceful resistance.
The premium investors demand to hold Egyptian debt over similar-maturity U.S. Treasuries was at 311 basis points yesterday, according to JP Morgan & Chase indexes. Despite being cut by more than 60 percent since Mursi’s ouster, it compares with 78 basis points in April 2010, when Egypt last tapped international debt markets.
Bets on aid from the GCC have helped stabilize the Egyptian pound, which lost 2.8 percent this year and 19 percent since the start of the uprising that toppled Hosni Mubarak in 2011 due to a shortage of foreign currency. The premium to buy dollars in the black market over the official interbank rate of 7.15 pounds was at 2.3 percent today, according to a Bloomberg survey of local dealers. That’s the lowest since August.
S&P cut Egypt six times since the start of 2011, before upgrading it one level in November. It changed the outlook to stable from negative last month.
“Gulf support and a potential IMF deal should force the ratings agencies to reconsider their stances on Egypt,” El Bawab said.