Violence Post-Morsi No Bar to Yields at 2-Year Low: Arab Credit

Egypt’s borrowing costs, which slid to a two-year low this week, are set to decline further as a cut in interest rates and foreign aid stabilizes the pound in the conflict-ridden country.

The average yield on three-month treasury bills plunged 91 basis points to 11.61 percent at the latest auction. The yields have tumbled 276 basis points to the lowest since June 2011 since the military deposed Mohamed Morsi last month. The local-currency debt yields 30 percent more than in similarly rated Pakistan and more than double that of Lebanon.

Egypt’s central bank cut the benchmark rates last week for the first time since 2009 to boost growth. The move comes as the government seeks to disperse thousands of pro-Morsi protesters in Cairo, following deadly clashes with security forces last month. The country is seeking to use the $12 billion of Persian Gulf aid secured in July to restart an economy growing at about a third of the 6.2 percent it averaged in the five years leading to the first revolt in 2011.

“We’re seeing a lot of things fall into place in favor of economic recovery in terms of aid, lower borrowing costs and renewed confidence in the government, which all point to lower yields ahead,” Nour Mohei-el-Din, assistant general manager for treasury at BNP Paribas Egypt, said by phone Aug. 4. “Politically, there’s a lot of optimism that sooner or later protesters will pack up and go home because the decisions that have been made are irreversible.”

Reserves Rise

At least $5 billion of the aid pledged by Saudi Arabia, United Arab Emirates and Kuwait have been transferred, according to state-run media. That has helped boost foreign reserves to $18.9 billion in July from $14.9 billion in June and stabilize the pound, which has gained 0.5 percent since July 3. It had lost almost 12 percent since the central bank started rationing foreign currency in December.

The aid has put the country’s “external position in a much better situation,” Jason Tuvey, assistant economist at London-based Capital Economics, said by phone yesterday. “The economy remains fragile with industrial production still contracting in annual terms, so it would be too early to say things are improving in Egypt.”

‘Welcome Sign’

Local debt costs surged following Hosni Mubarak’s ouster in 2011, taking the three-month average yield from 9.5 percent to as high as 14.75 percent in June 2012. Banks have been the main buyers of the debt as foreign investors, deterred by more than two years of unrest and a weakening currency, dumped nearly all of the 59.4 billion pounds they held in T-bills at the end of 2010.

The higher yields led interest payments to more than double since June 2011 to 182 billion pounds ($26 billion) this year, according to Finance Ministry data. About a quarter of the country’s budget is consumed by debt-service and another 55 percent by food and fuel subsidies and public worker wages. Post-Mubarak governments have sought to change the structure with little success.

“The drop in yields is a welcome sign and frees up some room to spend elsewhere such as public investment to boost the economy,” Tuvey said. “But if there’s no sign the government is making progress on reining in spending over the next month or so, we could see yields rise again.”

‘More Optimism’

The government is seeking to raise a record 200 billion pounds this quarter at domestic debt auctions, its primary source of funding the Middle East’s highest budget deficit. That gap probably widened to 12 percent of economic output in the year that ended in June, according to the average of 11 economist estimates compiled by Bloomberg.

The yield on Egypt’s benchmark $1 billion of 5.75 percent eurobonds due in April 2020 has risen 32 basis points from a post-Morsi low of 8.33 percent on July 12 as Morsi’s backers vowed to remain on the streets until he’s reinstated. The yield is down 212 basis points, or 2.12 percentage points, since his ouster July 3.

“We expect borrowing costs to fall even more in the short term because there’s more optimism now about the government’s ability to make the necessary changes, even in unconventional ways,” Mohamed Kotb, regional asset management director at Cairo-based Naeem Financial Investments, said by phone yesterday. “For that to continue in the medium term, we would need to see consistency and progress on their part.”

Source: Bloomberg