By Isma Nabil
For many, the long term costs of Egyptian government debt were not forgotten amidst the widespread protests and celebrations seen after the ouster of former president Mohamad Morsi, with the total value of the first batch of government bills auctioned off since his removal dropping by nearly 1% compared to previous bids.
Egypt’s Finance Ministry stated that average returns on government bonds released by the Central Bank of Egypt one week ago at a value of EGP 3bn and lasting 182 days, decreased roughly 0.6% from 14.825% to 14.156%, with oversubscription rates reaching 1.6 times. Returns on bonds lasting 357 days, valued at upwards of EGP 4bn, decreased nearly 1%: from 15.406% last week to 14.609%.
Hani Genina, head of research at investment bank Beltone, said that both Saudi Arabia and the United Arab Emirates’ warm reception to the removal of former president Muhammad Morsi may be a signal that increased amounts of aid will be coming into Egypt over the coming months and years.
He said the move would provide a big boost to foreign investors seeking to once again put their money into Egypt’s government debt market, many of whom withdrew their money from the country after the outbreak of the January 25th revolution.
He added that foreign investors have recently purchased 20% of newly available government tranches, and that he expects millions of dollars in additional investments to continue to pour into Egypt’s government debt market in the coming months.
Ganina further stated he expects interest rates on treasury bonds to reach their 12% minimum as a result of new foreign aid and investments pouring into the country.
Return rates on government debt tools have been steadily increasing since former president Mohamed Morsi’s constitutional declaration on 22 November 2012, a fact which has been compounded by repeated credit downgrades seen since the outbreak of the January 25th revolution by international rating agencies. Morsi’s decision to freeze previously agreed upon tax increases further caused return rates to increase, with those on short term bonds rising to 14.5%, while those for long term bonds, (lasting upwards of 10 years), being recorded at 17%, the same rate seen in June 2012.
Hatim Yousseff, treasury representative for a foreign bank operating in Egypt, stated that increases in returns on government debt tools is a natural reaction to the political instability seen throughout the country.
There are also signs of a possible liquidity crisis emerging within Egyptian banks over the coming months, a fact which could obstruct expected decreases in the cost of government debt tools, especially as the government continues to apply pressure on banks. He added that all of the country’s economic indicators were pointing to the probability that return rates on government debt tools would increase, along with the price of basic goods.
Egypt’s Ministry of Finance plans on borrowing upwards of EGP 200bn from banks during the first quarter of the upcoming fiscal year, a 17.5% increase compared to the first quarter of the previous fiscal year, during which government borrowed EGP 165bn.
Hisham Akasha, vice chairman of the National Bank of Egypt, said that increases in the price of government debt tools are temporary and will only exist over the short term, adding that such indicators are merely the result of current political instability seen throughout the country. He stated that he expects reconciliation and national dialogue to take place within Egypt over the coming months, which would help the country to stabilise and lead to increases in all of its economic indicators, in particular returns on government debt tools, which he admitted were currently at their highest rate seen in years.
Akasha added that repeated credit downgrades and current increases in returns on government debt tools were the result of continued political division seen throughout Egypt. He stated that with dialogue and reconciliation Egypt’s economic indicators would improve along with the country’s international credit rating.
Muhammad al-Bik, treasury representative within the Egyptian Arab Land Bank, stated the country’s current economic indicators could be attributed to the fact that Egypt was still in the beginning stages of its most recent transition, pointing out that increases on returns for government debt tools had already begun several months prior to the outbreak of the 30 June protests. He added that he expected such increases to continue as long as Egypt’s political situation remained unstable.
He continued that the prospect of Egypt’s Supreme Council for the Armed Forces (SCAF) once again taking control of the country was among one of the worst scenarios Egypt could face in its attempt to get its economy back on track. He predicted that such a move would lead to further decreases in rates of foreign investment, which have already dropped considerably, in addition to that of the country’s foreign currency reserves, saying further that government securities could also be expected to suffer from additional credit downgrades. All of these factors combined will lead to further increases in returns on government debt tools in the short and long term, he said.
The Egyptian government has recently been victim to intense financial pressure from abroad due to its high rate of domestic debt, which has been estimated to total upwards of EGP 1.4tn (EGP 199bn), in addition to that of the country’s foreign debt, which totals $44bn. Egypt’s total debt has been estimated as representing 94% of the country’s GDP, which witnessed just 2.1% growth during the previous financial year ending on 30 June, its lowest level in 20 years.
Translated from Al-Borsa Newspaper