Egypt Debt Rally Missed by Outsiders Shows Al-Sisi Challenge
For all of the gains in Egypt’s financial markets since President Abdel-Fattah al-Sisi took over this year, one trend exposes the fragility of the economy: Foreigners want no part of the country’s domestic debt.
Non-Egyptians have cut their holdings in the $67 billion Treasury-bill market to less than 0.2 percent from 21 percent in 2010, according to central bank data. Investors say yields are too low to compensate for the risks in an economy weakened by almost four years of political turmoil.
T-bill rates have continued to plunge in the most indebted Arab nation behind Lebanon, even without foreign buyers, as local banks sought safety in government securities over loans to customers or companies. Without international investors, Egypt is reliant on handouts from Gulf allies that Citigroup Inc. says may start to dry up with falling oil revenue.
“What Egypt needs is for foreign investors to come in and buy T-bills so banks can focus more on the business of lending to corporates as growth picks up,” said Denise Prime, who helps oversee $6.5 billion of emerging-market debt as an investment manager at GAM International Management Ltd. in London. Egypt isn’t among her funds’ holdings. “The potential upside in Egypt’s turnaround story is far more limited on the fixed-income side.”
Slowing Economy
Growth in the $272 billion economy, North Africa’s biggest, has fallen to about 2 percent a year since the revolution in Tahrir Square in 2011, the slowest in more than two decades. Egypt’s pound has depreciated by 19 percent in the official market and by 25 percent in the black market, which was born out of a shortage of dollars. The budget deficit has grown to almost 13 percent of gross domestic product, one of the highest levels in the Middle East.
Average auction yields on one-year T-bills have dropped by 3.62 percentage points since July 2013, when al-Sisi’s military removed an elected Islamist government from power. The 11.79 percent average yield at Egypt’s Dec. 18 debt auction compares with 12.31 percent for Brazil at its most recent sale of one-year securities last month. Standard & Poor’s rates Egypt’s short-term local-currency debt two levels below Brazil’s at B. Equally-rated Nigerian debt yielded an auction average of 15.99 percent this month.
Returns are further squeezed by a 20 percent tax, twice the rate on equities, and the cost of non-deliverable forward, or NDF, contracts to hedge the risk of further currency depreciation. The final return may be trimmed to as little as 1.25 percent, according to Commerzbank AG.
‘Not Ready’
Egyptian notes “are some of the best investments in the Middle East and North Africa region if investors are willing to go in without the NDF hedge,” Apostolos Bantis, a Dubai-based credit analyst at Commerzbank, said in a phone interview. “But they’re not ready to do that yet. A lot of them still have images of Tahrir Square and instability in their heads.”
For local banks, Treasuries are the surest way to earn a return from surging deposits as Egyptians save in case of further turbulence. As of September, the loan-to-deposit ratio at banks in Egypt was near the lowest since at least 2000, according to the most recent central bank data. Their share of the Treasury market has grown to 76 percent from 56 percent four years ago.
Commercial International Bank Egypt SAE, the nation’s biggest publicly traded lender, reported record quarterly earnings last month, helped by increased holdings of government debt.
Equity Optimism
While avoiding the Treasury market, foreign investors poured about $650 million into equities between June and September, more than 10 times the net flows to T-bills, according to the stock exchange and central bank data. Non-Egyptians accounted for about 16 percent of share trading this year. The EGX 30 Index has gained 28 percent in 2014, fifth best globally among 93 indexes tracked by Bloomberg. The government’s 5.75 percent Eurobonds due April 2020 have surged this year, sending the yield down 191 basis points to 4.86 percent at 10:17 a.m. in Cairo.
Equity-market optimism has been stoked by more than $15 billion of aid provided by Gulf nations since July 2013 and the prospect of economic growth accelerating to 3.5 percent for the current fiscal year to June 2015, according to the average of 9 economist estimates compiled by Bloomberg. Reductions to fuel subsidies in July may help officials trim the budget deficit to 10.5 percent this year. The central bank has stepped in to halt the pound’s depreciation, holding the rate at 7.15 per dollar in the official market since June.
Sentiment Swings
“The stock market usually moves ahead of the economy,” Hany Farahat, a senior economist at Cairo-based CI Capital, said by phone. Improved confidence will enable the government to sell more debt that matures in longer than a year, which will reduce Egypt’s vulnerability to swings in investor sentiment, he said.
Egypt’s growing demand for dollar inflows means it’s still likely to need foreign investors to return to its domestic debt market. The 47 percent plunge in crude from this year’s peak in June may limit further Gulf nation aid, Farouk Soussa, the chief Middle East economist for Citigroup Inc., said in an interview from London last month.
“Egyptian T-bills aren’t as attractive as they once were,” Lutz Roehmeyer, a money manager overseeing $1.1 billion of emerging-market debt at Landesbank Berlin Investment GmbH in Berlin, who exited the Egyptian T-bill market in 2012, said by phone. “The main factor in Egypt’s economic stability is support from its Arab neighbors, which is unsustainable. Sooner or later, Gulf aid will stop and Egypt has to be able to stand up on its own.”
Source: Bloomberg
