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Egypt may struggle to appease public on subsidy cut: Arab Credit

Egypt’s government may struggle to improve the living conditions that sparked last year’s uprising as delays in foreign aid force the government to scale back subsidies as it finances a record debt-servicing bill. The country will slash energy subsidies by 27 percent in the 2012-13 fiscal year, the first cut in six years, to 70 billion pounds ($12 billion), according to this year’s government budget. Total subsidies, grants and social benefits will fall 5.6 percent in the year that started July 1 to 146 billion pounds, the first drop in three years, the data show.

The nation, whose interest payments on debt are set to soar 27 percent this year, is resuming talks this month for a $3.2 billion International Monetary Fund loan and this week secured a $2 billion deposit from Qatar. These funds are equal to less than a quarter of the expected 134 billion pounds of interest payments this year. Egyptian pound Treasury-bill yields rose last week to levels at least three times higher than those in Greece and Spain.

“The government is facing a serious task and a breakthrough won’t take place unless it’s able to secure significant international aid and create jobs to restart the economy,” Nour Mohei-al-Din, assistant general manager for Treasury at BNP Paribas Egypt, said by phone on Aug. 12. “The IMF loan is about two weeks worth of T-bill sales so it’s a start, but it won’t end Egypt’s problems.”

The yield on Egypt’s six-month Treasury bills climbed 9 basis points, or 0.09 percentage point, last week to 15.3 percent. That compares with 10.2 percent in January 2011, the start of a popular revolt that ousted President Hosni Mubarak, and exceeds the 4.68 percent and 3.69 percent Greece and Spain agreed to pay at auctions of similar-maturity notes in the past month.

Egypt’s borrowing costs jumped as foreign investors exited the country and left the onus on local banks to finance a deficit that the IMF forecasts will rise to 10 percent this year, the highest in the Middle East.

President Mohammad Mursi, who took steps to consolidate power this week by ordering the top two military generals to retire, is working with a budget set by the previous military- appointed government that aims to reduce the deficit to 7.6 percent of economic output this fiscal year. The gap was 8.8 percent in the first 11 months of last year, the state-run Middle East News Agency reported in July.

Reducing the budget gap makes it harder for Egypt’s first democratically elected leader to meet campaign pledges to create a fund for unemployment benefits and boost economic growth to 7 percent a year, on average, by 2016.

The country of more than 82 million, where more than one in five people live below the poverty line according to the United Nations, supports the population through subsidies on basic items including fuel and bread. Subsidies make up 27 percent of spending in this year’s budget, down from 32 percent in the 2011-12 fiscal year. Egypt said in December it would lift subsidies on energy-intensive industries.

“Financing options are limited because most of the financing is domestic and that’s putting pressure on local interest rates,” Richard Fox, London-based head of Middle East and Africa Sovereigns at Fitch Ratings, said by phone Monday.

Egypt has made headway in getting external support as the political scene stabilizes. The yield on the nation’s 5.75 percent dollar-denominated bonds maturing in April 2020 fell Monday after Mursi retired Field Marshal Mohammad Hussein Tantawi, the defense minister, and Lt. Gen. Sami Enan, the armed forces’ chief of staff. The yield has declined 33 basis points since Mursi was sworn in on June 30 to 6.17 percent Monday.

“This is the right time” to cut energy subsidies, Said Hirsh, London-based Middle East Economist at Capital Economics Ltd., said by phone Monday. “This is definitely going to be one of the areas the IMF would want to see changes in. It’s a lot easier to address energy subsidies than look at other aspects like food, for example, or taxation.”

Qatar’s deposit with Egypt’s central bank this week follows a $1 billion deposit by Saudi Arabia in May. Libya has also pledged a deposit of about $2 billion and the U.S. is committing $500 million in budgetary aid, Finance Minister Momtaz al-Saieed said on Aug. 12.

The money will help stem depletion of the nation’s official reserves, which slumped 60 percent since the uprising to $14.4 billion in July.

Saieed said last month Egypt would raise the average domestic debt maturity to 1.8 years from 1.3 years at the end of 2011 to reduce refinancing risks.

Still, domestic debt yields remain near records and five-year credit default swaps, the highest in the Middle East since October, were at 570 on Aug. 10, 72 basis points more than than second-place Lebanon, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The contracts pay the buyer face value if a borrower fails to meet its obligations.

A slow recovery in tourism and investment has also hurt economic growth, which Central Bank Governor Farouk al-Okdah forecast in June to slow to 2 percent this fiscal year from 2.5 percent in 2011.

 
A version of this article appeared in the print edition of The Daily Star on August 15, 2012, on page 5.
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