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Easing Egypt debt risk shows investors favor Sisi victory

An election campaign billboard of presidential candidate and former army chief Abdel Fattah al-Sisi is seen on top of a building in Cairo, alongside narrow houses and factories, May 22, 2014. (REUTERS/Amr Abdallah Dalsh)

To gauge how Field Marshal Abdel-Fattah al-Sisi’s likely victory in this week’s Egyptian presidential election is winning over investors, look no further than the country’s creditworthiness.

The cost of insuring the nation’s debt fell to the lowest since July 2011 this month, according to data provider CMA. It was at 348 basis points Tuesday, about half its level in the runup to the 2012 presidential race, in which the Islamist Mohammad Morsi beat 12 contenders into office.

Since Morsi was ousted on July 3, the military-backed interim government has attracted billions of dollars in aid from the Persian Gulf and has promised reforms to cut the Middle East’s highest budget deficit and boost investment. Egypt’s default-swap contracts, now priced at about half for those of similarly rated Pakistan, may signal improving investor sentiment and better prospects for the most populous Arab state to tap international capital markets.

“Investors view a Sisi win as a near certainty that would bring about more stability in Egypt and, going forward, this can generate some sort of economic resurgence,” Farouk Soussa, London-based chief Middle East economist at Citigroup Global Markets Ltd., said by phone on May 22. “The way they see Egypt is that it’s going to give you a decent return and is less likely now to blow up in your face.”

The yield on the government’s 5.75 percent Eurobonds due in April 2020 fell less than one basis point to 4.96 percent as of 2:46 p.m. in Cairo, the lowest since December 2010, data compiled by Bloomberg show.

The benchmark EGX 30 Index of stocks slipped 0.3 percent Monday from an almost six-year high, paring gains in the past six months to 40 percent, the best performing equity gauge worldwide after Dubai, the data show. The stock market was closed Tuesday for a public holiday announced by the government Monday night to encourage people to vote.

The commission in charge of supervising the election extended voting by one hour to 10 p.m. Tuesday, saying they may keep stations open beyond that if necessary “depending on conditions at each polling station.”

Unofficial results are expected to start streaming in overnight as vote counts are completed at each station. The official result will be announced by June 5, Nile News reported Tuesday.

Egypt’s economy will probably grow 2.5 percent this year, up from 2.1 percent in 2013, according the median estimate in a Bloomberg survey of economists. Saudi Arabia, the United Arab Emirates and Kuwait have pledged about $15 billion in aid.

“Aid inflows from the Gulf have substantially improved Egypt’s debt fundamentals, as have the ever more convincing signs that a new political order is finally coalescing,” Simon Williams, chief economist for the Middle East and North Africa at HSBC Holdings Plc in Dubai, said Monday. “Should that be reversed, that will necessarily reflect on the country’s credit fundamentals.”

The interim military-backed government forecast the budget deficit would drop to 12 percent of economic output for the fiscal year ending in June, down from 14 percent last year, Finance Minister Hany Kadry Dimian said in March.

Standard & Poor affirmed its B- rating, six steps below investment grade, and stable outlook for Egypt on May 16, saying that official donors would continue to provide the government sufficient funds to manage short-term and external funding needs.

While Egyptian bonds have gained and the cost of protecting against default has fallen, the country’s securities maturing in 2020 and 2040 and its default swaps are among the least liquid in the Middle East, HSBC’s Williams said.

Foreign investors held less than 400 million pounds of ($56 million) local-currency T-bills as of February, from more than 59 billion pounds at the end of 2010 before the outbreak of protests that toppled former President Hosni Mubarak the following year, data from the central bank show.

The extra yield investors demand to own Egypt’s dollar debt rather than U.S. Treasuries dropped five basis points to 349 on May 22, the lowest level since August 2011, according to JPMorgan Chase & Co. indexes. Egypt’s dollar bonds have returned 14 percent this year, compared with a 7.3 percent average gain for developing nations worldwide, according to data compiled by Bloomberg.

While declining yields and narrowing spreads may not signal confidence in the government’s ability to implement economic reforms, it does show investors are increasingly interested in the market, according to Citigroup’s Soussa.

“This is just a sign that Egypt isn’t a complete basket case anymore,” he said. “It’s investable.”

 
A version of this article appeared in the print edition of The Daily Star on May 28, 2014, on page 5.

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