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Government debt foils Egypt rebound

Egyptian banks are lending the least to private business in more than a decade as the military-backed government’s debt swamps the market, hindering the nation’s economic recovery.

The ratio of loans to deposits, which mostly reflects lending to the private sector, fell to less than 45 percent in October, according to the latest central bank data. That’s the lowest level since at least 2000. The government’s share of total domestic credit, most of it debt securities, climbed to 62 percent in the month from 45 percent before the country’s 2011 uprising, the data show.

Seven months after the military overthrew Islamist President Mohammad Morsi, and three years to the day since Hosni Mubarak was forced from power, government reliance on local banks to finance the Middle East’s highest budget deficit continues to grow. The squeeze on business credit is weighing on the economy, already suffering its worst slump in 20 years.

“The scale of government borrowing is so large, we need to see a significant reduction for commercial banks to have the incentive to extend credit to the private sector again,” Anthony Simond, an emerging markets investment analyst who helps manage $10.5 billion at Aberdeen Asset Management Plc., said by phone on Feb. 3 from London. “That may take years.”

Economic growth slowed to 1 percent in the fiscal quarter ended September, from 2.6 percent a year earlier. That compares with a 6.2 percent annual average growth rate in the last five years of Hosni Mubarak’s rule. The record-low proportion of loans to deposits in Egypt compares with 104 percent in Morocco. The tourism and agriculture-reliant economy grew 4.4 percent last year. Egypt’s budget deficit as a percentage of gross domestic product was 13.7 percent in the fiscal year that ended in June. The government targets a ratio of 10 percent in the current year.

Unless the government changes its borrowing strategy, Egypt “will eventually see business being crowded out by the government,” Mohammad Abu Basha, a Cairo-based economist at EFG-Hermes Holding SAE, the country’s biggest investment bank, said by phone Feb. 5.

The current low private sector borrowing is actually a result of the struggling economy, Abu Basha said.

Political turmoil and increased risk of devaluation of the pound have driven out all but about 1 billion pounds ($144 million) of the 59 billion pounds of treasury bills held by foreign investors before the 2011 revolt.

The local currency has tumbled 16 percent in official trading over the last three years to 6.9613 per dollar, according to BNP Paribas MENA prices. That includes an 8.4 percent decline in 2013, its worst year in a decade. The pound trades at a 5 percent discount to the official rate in the black market, according to Bloomberg News surveys.

Egypt’s January purchasing managers’ index, an indicator of manufacturing activity, was at 48.7 compared with 52 a month earlier, according to HSBC Holdings Plc. and Markit. The drop below 50, the level that separates expansion from contraction, shows “the vulnerability of the Egyptian economy to renewed bouts of political unrest,” Jason Tuvey, assistant economist at London-based Capital Economics Ltd., said in a Feb. 4 report. Hundreds of Islamist protesters against the military-backed government have died in clashes with security forces since the military seized power in July.

“Declining business confidence amid rising political uncertainty has meant low demand for loans from the private sector,” Abu Basha said.

The Finance Ministry will issue 203 billion Egyptian pounds of debt this quarter, 36 percent more than a year earlier. The government announced 64 billion pounds of spending on health, education, transportation and the implementation of a minimum wage for federal employees to stimulate the economy.

The yields on Egyptian government bonds are among the highest in emerging markets, helping banks boost profits amid lending decrease. The average auction yield on one-year T-bills was at 10.83 percent last week, compared with 15.41 percent before the military takeover. Similar-maturity notes in Lebanon paid 5.35 percent at auction in the past month.

“Buying government debt has been the easiest way for banks to make money over the last few years,” Aberdeen’s Simond said.

“While investment inflows await political stability, government stimulus will be the main driver of growth.”

 
A version of this article appeared in the print edition of The Daily Star on February 12, 2014, on page 5.

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Summary

Egyptian banks are lending the least to private business in more than a decade as the military-backed government's debt swamps the market, hindering the nation's economic recovery.

The government's share of total domestic credit, most of it debt securities, climbed to 62 percent in the month from 45 percent before the country's 2011 uprising, the data show.

Seven months after the military overthrew Islamist President Mohammad Morsi, and three years to the day since Hosni Mubarak was forced from power, government reliance on local banks to finance the Middle East's highest budget deficit continues to grow.

Economic growth slowed to 1 percent in the fiscal quarter ended September, from 2.6 percent a year earlier.

The tourism and agriculture-reliant economy grew 4.4 percent last year.

The government targets a ratio of 10 percent in the current year.


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