Easing Egypt Debt Risk Shows Investors Favoring El-Sisi Victory

Big 5

 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 fell to the lowest since July 2011 this month, according to data provider CMA. It was at 350 basis points at the end of last week, about half its level in the run-up to the 2012 presidential race, in which the Islamist Mohamed Morsi beat 12 contenders into office.

Since Morsi 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 government’s 5.75 percent Eurobonds due in April 2020 gained for a sixth day, sending the yield down to 4.97 percent yesterday, the lowest since December 2010, according to data compiled by Bloomberg. The benchmark EGX 30 Index of stocks slipped 0.3 percent, dropping from an almost six-year high, and paring gains in the past six months to 40 percent, the best performing equity gauge worldwide after Dubai, the data show.

Economic Recovery

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.

S&P Rating

Standard & Poor’s affirmed its B- rating, six steps below in investment grade, and stable outlook on 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 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 less than 400 million pounds ($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.

Spreads Narrow

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 6.8 percent this year, compared with a 4.8 percent average gain for developing nations worldwide, according to the Bloomberg Emerging Market Local Sovereign Index.

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.”