Foreign Money Can't Tame Egyptian Yields Amid Borrowing SpreeBy
Fundraising target 17% higher this quarter than last year
Offshore investors boosted holdings since devaluation
An influx of foreign cash into Egyptian debt securities isn’t denting yields that remain the highest in emerging markets amid a government borrowing binge.
Offshore investors boosted holdings of government Treasury bills to 79 billion pounds ($4.4 billion) as of April 4, compared with less than 1 billion pounds before a currency devaluation in November, according to Finance Ministry data. Average yields on Egyptian debt have climbed 84 basis points this year to 17.5 percent, compared with a 13-point rise to 4.73 percent for the average of 31 countries in the Bloomberg Emerging Market Local Sovereign Index.
Africa’s third-biggest economy, also the most-populous Arab nation, is facing a widening budget deficit and growing debt pile that is costing more to service as it tries to shield tens of millions of people living in poverty from inflation that has surged to more than 30 percent on an annual basis. The government raised 11 percent more than its target for domestic debt sales since the start of the year, and 18 percent over budget since the beginning of March, according to data compiled by Bloomberg.
“You cannot adopt inflationary reforms such as floating the currency and cutting subsidies while consolidating your budget at the same time,” said Hany Farahat, an economist at Cairo-based CI Capital Holding who expects the budget deficit to exceed 12 percent of gross domestic product this fiscal year, compared with the government’s target of 10.7 percent. “There must be a trade-off.”
Egypt sold T-bills ranging in maturity from three months to one year last week at average yields of more than 19 percent, raising 30.4 billion pounds, or about a quarter more than its target. Auctions are scheduled for Thursday, Sunday and Monday, part of the Finance Ministry’s plan to raise 342 billion pounds this quarter, a 17 percent increase from a year earlier. The pound traded at 18.1578 per dollar as of 12:01 p.m. in Cairo, 51 percent weaker than before the devaluation on Nov. 3.
International funds, which had shunned the country’s debt securities in the years following the 2011 uprising that ended Hosni Mubarak three decades in power, held 3 percent of Egypt’s T-bills at the end of January, compared with less than 0.1 percent before the currency float, according to central bank data.
“High interest rates are a temporary side-effect, without which the pound float wouldn’t have achieved its purpose of attracting foreign capital,” Farahat said. “They’ve put Egyptian assets back on the investment map. So, for foreigners, it makes sense to rush to get a piece of the pie.”
Egypt’s financial sector has attracted $19.2 billion of inflows since authorities relinquished control of the pound, the central bank said in a text message to reporters Tuesday. The announcement came on the same day that the International Monetary Fund cut the country’s growth forecast for this year to 3.5 percent from an October estimate of 4 percent. The IMF agreed in November to provide the nation with a $12 billion loan after the government committed to changing economic policies.
Samy Khallaf, the head of the Finance Ministry’s public debt division, declined to comment on the increase in government borrowing.
(An earlier version of this story corrected the time frame for foreign holdings in the second paragraph.)
— With assistance by Ahmed Feteha