If Bond Market Could Decide, Egypt Would Be Set for Upgrade

Updated on
  • Aberdeen says rating upgrades are possible within a year
  • Yield on Egypt’s dollar bonds declines to lowest since 2015

With its finances in tatters, a credit upgrade was out of the question for Egypt before it secured an IMF loan agreement. Fast-forward six months, and it’s already won promotion in the bond market.

Egypt’s dollar bonds have sprung back this year, driving its borrowing costs to the lowest level since 2015. That has lifted the market perception of Egyptian risk above that of some ratings assessors. The nation’s debt has had an implied rating of B2 or better for almost three months, according to Moody’s Analytics, one level higher than its official grade.

Foreigners began buying Egyptian assets again after the International Monetary Fund last year gave its support to President Abdel Fattah El-Sisi’s economic policies. Not only did the country abandon its currency peg and raise interest rates by 300 basis points in November, it also increased fuel prices to help secure a $12 billion, three-year IMF loan program.

The Egyptian pound sunk as much as 54 percent after it began freely floating, pushing inflation to 30 percent, but it has stabilized at about 18 per dollar since mid-March.

Read More: Foreign Holdings of Egyptian T-Bills Almost Triple Since January

“Egypt has traded very well due to the positive reform momentum, IMF assistance and general bullish view toward emerging markets,” said Anthony Simond, who holds Egyptian bonds among the $11 billion of debt he helps manage at Aberdeen Asset Management Plc in London. “If the government can keep its focus and not water down its plans, then an upgrade should be possible within six to 12 months.”

The yield on Egyptian Eurobonds due in 2025 has tumbled 133 basis points this year to 6 percent on Wednesday, the lowest level in almost two years. While it has since risen 10 basis points, the rate’s decline this year is almost four times the drop in the average yield of emerging-market sovereign bonds, according to the Bloomberg USD Emerging Market Sovereign Bond Index.

The Market’s ’Right’

The government plans to tap the international bond market before the end of June, and it expects to get the second portion of the IMF loan next month, Finance Minister Amr El-Garhy said on Sunday.

“The market is probably right and thus leading the rating agencies,” said Stephen Bailey-Smith, an investment strategist at Kolding, Denmark-based Global Evolution Fonds A/S, which manages $4.6 billion, including Egyptian debt. The nation’s upcoming bond sale “will do well, as the search for yield is still solidly entrenched in market psyche.”

Egypt’s credit rating at Moody’s Investors Service is B3, six levels below investment grade, similar to its B- score at S&P Global Ratings. The North African nation is rated one notch higher at Fitch Ratings. Credit analysts at Moody’s and Fitch weren’t available to comment when contacted by telephone Thursday. S&P declined to comment on Egypt’s credit rating because it’s being reviewed.

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