Egypt Debt Yield Surge Seen Fading as Deficit Eases: Arab CreditAhmed A. Namatalla and Mariam Fam
The increase in Egypt’s borrowing costs after President Abdel-Fattah El-Sisi raised energy prices will be short-lived because the measures will help narrow the budget deficit, Emirates NBD PJSC’s Egypt unit and Capital Economics said.
El-Sisi’s decision to cut fuel subsidies will reduce borrowing needs, and may help lower yields by as much as 1 percentage point by the end of the quarter, said Nour Mohei-el-Din, assistant general manager for treasury at Emirates NBD SAE, a unit of Dubai’s biggest bank.
The average yield on nine-month notes advanced 16 basis points to 11.1 percent this week at the first sale after prices rose. The yield on seven-year bonds sold yesterday climbed 36 basis points to 14.53 percent, the highest since August.
“We expect a one-time inflationary impact that may force yields up over the next month before they stabilize and come back down,” Mohei-el-Din said by phone from Cairo yesterday. “The government took a serious step to cut the deficit.”
The reduction in subsidies, which consume about 30 percent of the budget, came a month after the United Arab Emirates urged Egypt to restore investor confidence by shoring up public finances. The U.A.E. has sent Egypt billions of dollars of aid since El-Sisi led an army takeover a year ago. Previous governments have struggled to shrink a deficit that ballooned to as much as 14 percent of economic output as investment and tourism dwindled after the uprising of 2011.
As Defense Minister, El-Sisi led the ouster of Islamist President Mohamed Mursi a year ago. The intervention was followed by a crackdown on the Muslim Brotherhood, the group that fielded Mursi for the presidency in 2012, leaving hundreds dead and thousands in jail.
Fitch Ratings said El-Sisi’s decisions were positive for the country’s credit profile. El-Sisi’s June election victory and “effective repression of much of the opposition means the political environment is more conducive to fiscal consolidation,” Paul Gamble, director of sovereigns, wrote in a report released today. Fitch rates Egypt B-, six levels below investment grade.
“Lower subsidies will mean a lower deficit, which will mean a smaller borrowing need from the market; hence, both sentiments should help lower borrowing costs,” Raza Agha, London-based chief Middle East and Africa economist at VTB Capital, wrote in an e-mailed response to questions yesterday. In the near term, though, inflation may jump to more than 13 percent over the next six months, he said. The annual rate stood at 8.2 percent in May.
The risk of a surge in inflation after El-Sisi’s fuel-price move may keep yields higher for longer than some economists expect.
“The market is waiting to see just how much of an inflationary impact lifting subsidies will have, which may take several weeks,” said Ahmed Kheir Eldin, a fixed-income trader at Cairo-based Bank of Alexandria SAE. The lender is one of 15 so-called primary dealers authorized to buy debt directly from the government.
“If we start to see spillover effects on a wide range of consumer products, it could force the central bank to raise rates, which would surely continue to drive up yields,” Kheir Eldin said by phone yesterday. He said the government’s plan to raise a record 220 billion pounds ($31 billion) at auctions of treasury bills and bonds this quarter may add to the pressure.
Egypt’s central bank has been moving in the opposite direction, cutting rates three times in the past year, most recently in December when it lowered its benchmark deposit rate to a two-year low of 8.25 percent. The next rates meeting is scheduled for July 17.
Depreciation of the pound had halted ahead of the fuel-price increases. The currency has been little changed at central bank dollar auctions from May 29, after losing 2.8 percent since the start of the year. In the interbank market, where its movement is controlled by the regulator, it stood at 7.1501 per dollar as of 1:15 p.m. in Cairo, according to prices compiled by Bloomberg.
The decision on fuel prices may test whether the former army chief El-Sisi has secured enough public backing to tackle entitlements that his predecessors have steered clear of changing, out of concern over a public backlash. El-Sisi has also raised electricity prices and increased taxes on cigarettes and alcohol.
“The reforms are quite large and they’ve been pushed through quickly after President El-Sisi’s election,” William Jackson, emerging-market economist at Capital Economics in London, said by phone yesterday. “This has been bolder than we expected. It reduces the risk premium on Egypt’s local debt, so yields should ultimately go down.”
(An earlier version of this story corrected the name of Mohei-el-Din’s bank in the first and second paragraphs.)