After shying away from the international financial market, Egypt may well be forced by heavy funding needs to tap it just as turbulence pushes up rates, threatening to undermine its deficit-cutting ambitions.
The country, which has borrowed heavily from abroad since it drew up an economic reform program with the IMF in 2016, faces a tough foreign repayments schedule over the next two years as well as a rising bill from relentlessly more expensive oil imports.
Appetite for emerging market debt was already waning. But it declined even further following currency crises in Turkey and Argentina in August that in turn triggered an exodus of foreign investors from Egypt who must also be repaid.
Finance Minister Mohamed Maait has said Egypt was looking to sell around $5 billion in Eurobonds, possibly in the first quarter of 2019. But last month he announced a roadshow starting next week to promote bonds in Asia and Europe.
The government appears to have been waiting in the hope that emerging market turbulence would blow over.
“It seems that their funding needs are (now) urgent given how they are trying to tap the market in the current unfavorable conditions,” said a Cairo-based banker who tracks fixed income and asked not to be named.
Maait said Eurobond subscriptions would start “when we believe the time is right.”
EUROBONDS ‘ARE KEY’
The country aims to cut its budget deficit to 8.4 percent of GDP in the year to June 2019 from 9.89 percent the previous year. But that would imply over $20 billion of new funding.
Much of this could be raised in Egyptian pounds, but that still leaves significant foreign currency requirements.
“The Eurobonds are key,” said an analyst at a London bank. “They are cheaper than Egyptian pound borrowing. But on the other hand you are locking up expensive debt for five years.”
One mid-term Egyptian Eurobond that matures in February 2023 is currently yielding around 6.29 percent in the secondary market. Analysts say this is the likely minimum yield the government can expect.
Appetite will depend on what happens in the overall asset class, said Marshall Stocker, a portfolio manager of emerging market assets at Boston-based Eaton Vance who advised Cairo against a “gradualist” policy approach.
“We’re encouraged by the recent …developments, with the government recognizing that the external environment is getting tighter, and it needs to recommit to its reform policy and maybe accelerate some of its goals,” Stocker said.
Maait said Egypt was due $4 billion in additional foreign funding in December, including $2 billion from the International Monetary Fund. It just received a half a billion from the Arab African International Bank and expected the same amount from France and Germany.
The government must also repay foreigners who have been exiting the local securities market as well as rolling over debt already on the books.
Net foreign direct investment (FDI) for the 2017-18 financial year to June slipped to $7.7 billion from 7.9 billion a year before and net portfolio investment to $12.1 billion from $16 billion, the central bank said on Monday. Remittances from Egyptians working abroad jumped to $26.4 billion from $21.8 billion.
In July, the government said foreign holdings of Egyptian treasuries had fallen to $17.5 billion at the end of June from $23.1 billion three months earlier. Traders say even more dollars are likely to have fled since.
Egypt has some $24 billion in obligations coming due over the next two years, according to central bank data, though analysts say much of that debt is made up of low-cost loans from Gulf countries that are almost certain to roll it over.