Egypt’s IMF Loan Sees Bond Yields Drop To Two Year Lows

The 5.75 per cent dollar-denominated notes due April 2020 fell 13 basis points, or 0.13 percentage point, to 5.12 per cent, set for the lowest close since December 2010 in Cairo, according to data compiled by Bloomberg.

The EGX 30 Index gained 1.5 percent, the most since Nov. 6, to 5,489.49, taking its 2012 advance to 52 per cent, the world’s best performer among 93 gauges tracked by Bloomberg.

Egypt’s bonds were raised to overweight at Bank of America Merrill Lynch after the agreement was announced Tuesday.

The IMF could start distributing funds next quarter if the accord is approved by the lender’s board in December. The pact calls for gradually cutting the budget deficit from almost 11 percent in the last fiscal year, the Middle East’s biggest, to 8.5 percent of economic output in the year ending June 2014, the IMF said.

“The rally is justified and momentum should be sustained, barring any deterioration geopolitically,” Ahmad Alanani, Dubai-based Middle East director at Exotix Ltd., said by phone.

“The preliminary agreement appears to be on generous terms, which gave the markets an unexpected boon beyond what had already been priced in,” Alanani added.

The loan will carry an interest rate of about 1.06 per cent and be distributed in eight quarterly tranches, Andreas Bauer, who headed the IMF technical team to Cairo, said Tuesday.

Egypt’s credit rating was cut four times at Moody’s Investors Service to B2 – five levels below investment grade – after last year’s uprising ended the three-decade rule of Hosni Mubarak.

The crisis led to a decline in foreign reserves to $15.5 billion, or enough to cover about three months of imports, compared with almost nine before the revolution, fueling concern authorities will be forced to devalue the pound.

The accord “leaves some breathing room for the government to implement the necessary fiscal reforms,” Alanani said.

“Above all, it removes a lot of uncertainty and minimizes the chances for any immediate devaluation of the currency.”

The Egyptian pound, subject to a managed float, strengthened 0.1 per cent to 6.0984 a dollar. That pares its decline since the start of the January 2011 revolt to 4.6 per cent.

Cpifinancial