CAIRO: Egypt is turning to domestic lenders to wean itself off of central bank cash as the military-backed government struggles to curb inflation and spur economic growth.
The most indebted Arab country after Lebanon will sell about 40 percent more debt this quarter than it has maturing, seeking to lure money from lenders including National Bank of Egypt and Commercial International Bank Egypt SAE, the two leading bidders for government securities. That’s up from 15 percent a year earlier, according to data compiled by Bloomberg.
For all the political unrest sweeping the country six months after the ouster of President Mohammad Morsi, Egypt’s borrowing costs have tumbled to near the lowest in three years. That has made the local debt market a more attractive source of funding than central bank cash for a government seeking to tame inflation that has exceeded 10 percent in the past four months.
“The government can’t rely on the central bank forever because that carries inflationary risks,” Mohammad Abu Basha, an economist at Cairo-based EFG-Hermes Holding SAE, said by phone on Jan. 8. “This is a positive first step that gives officials the opportunity to rebalance the economy.”
Government obligations to the central bank more than tripled since the revolt that ousted Hosni Mubarak in 2011 to about 341 billion pounds ($49 billion) in September, the most recent official data show. Money supply, a measure of cash and deposits within an economy and an indicator of future inflation, climbed 17 percent in the first 11 months of last year, on course for the biggest increase since 2007.
Egypt plans to sell 203 billion pounds of domestic debt this quarter, Finance Ministry data show. It has about 144 billion pounds of securities maturing over the period, according to data compiled by Bloomberg.
The average yield on one-year notes fell to 11 percent at an auction last week, following three interest rate cuts since August. That’s more than 4 percentage points lower than before the military takeover and near the lowest since January 2011.
Egyptian policymakers are due to meet Thursday to decide borrowing costs after reducing the benchmark interest rate to 8.25 percent last month, the lowest in over two years
“The central bank’s argument is that risks to growth are greater than to inflation,” Raza Agha, London-based chief Middle East and Africa economist at VTB Capital, said by phone Wednesday.
“It’s walking a thin line because if the economy improves, naturally inflation will rise.”
The amount the government owes the central bank, equivalent to about 20 percent of gross domestic product for the fiscal year that ended in June, isn’t big enough to cause concern yet, according to London-based William Jackson, an emerging markets economist at Capital Economics Ltd.
This quarter’s borrowing helps the government lock in lower costs, Jackson said. “With many potential political flashpoints over the coming year, it would be quite easy to see yields going back up again.”
Egyptians ended voting Wednesday on a new constitution that may pave the way for parliamentary and presidential elections this year. Progress on the political transition has fueled a rally in the country’s benchmark Eurobonds, even after violence claimed hundreds of lives over the past six months. The yield on the nation’s 5.75 percent securities due 2020 slid 454 basis points, or 4.54 percentage points, since the military takeover in July to 6.23 percent Wednesday.
The drop in yields gave the government an incentive to extend the maturity of the debt it’s selling, said Samy Khallaf, head of the Finance Ministry’s debt management unit. The plan is to increase the average due date of outstanding liabilities to two years from 1.55 years by the end of June, he said in an interview from Cairo.
Thirty-four percent of this quarter’s debt sales are for notes that mature in more than a year, the highest proportion since at least 2004, according to Finance Ministry information.
“The most important thing for us right now is to increase our risk duration so that we’re not crowding out the private sector,” Khallaf said. Foreigners interested in the market have yet to invest amid political and social instability, he said.
Prime Minister Hazem al-Beblawi’s Cabinet has announced two economic stimulus packages totaling 50 billion pounds to improve growth, which has been at about 2 percent for the last three years. That’s a third of the pace of expansion in the final five years of Hosni Mubarak’s almost three-decade rule. Inflation climbed to an almost four-year high of 13 percent in November, before slowing to 11.7 percent in December.
“The problem is you’re using most of the borrowed money from the central bank for subsidies and wage increases, which aren’t countered by an increase in production,” said Abu Basha of EFG-Hermes. “That’s how you run the risk of higher inflation.”