Egypt confronts borrowing crunch

Finance Minister Mohamed Maait speaks during a news conference in Cairo, Egypt July 5, 2018. REUTERS/Mohamed Abd El Ghany

CAIRO: After shying away from the international financial market, Egypt may well be forced by heavy funding needs to tap it just as turbulence pushes up rates, threatening to undermine the country’s deficit-cutting ambitions. Egypt, which has borrowed heavily from abroad since it drew up an economic reform program with the IMF in 2016, faces a tough repayments schedule over the next two years and a rising bill from relentlessly more expensive oil imports.

Appetite for emerging market debt was already waning.

But it declined even further following currency crises in Turkey and Argentina in August that in turn triggered an exodus of foreign investors from Egypt who must also be repaid.

Finance Minister Mohammad Maait has said Egypt was looking to sell around $5 billion in Eurobonds, possibly in the first quarter of 2019.

But last month he announced a roadshow starting next week to promote bonds in Asia and Europe.

The Egyptian government appears to have been waiting in the hope that emerging market turbulence would blow over.

“It seems that their funding needs are [now] urgent given how they are trying to tap the market in the current unfavorable conditions,” said a Cairo-based banker who tracks fixed income and who asked not to be identified.

Maait said Eurobond subscriptions would start “when we believe the time is right.”

The country aims to cut its budget deficit to 8.4 percent of GDP in the year to June 2019 from 9.89 percent the previous year.

But that would imply over $20 billion of new funding.

Much of this funding could be raised in Egyptian pounds, but that still leaves significant foreign currency needs.

“The Eurobonds are key,” an analyst at a London bank said.

“They are cheaper than Egyptian pound borrowing. But on the other hand you are locking up expensive debt for five years.”

One midterm Egyptian Eurobond that matures in February 2023 is currently yielding around 6.29 percent in the secondary market.

Analysts say that this is the likely minimum yield that the government can expect.

Appetite will depend on what happens in the overall asset class, said Marshall Stocker, a portfolio manager of emerging market assets at Boston-based Eaton Vance who advised Cairo against a “gradualist” policy approach.

“We’re encouraged by the recent ... developments, with the government recognizing that the external environment is getting tighter, and it needs to recommit to its reform policy and maybe accelerate some of its goals,” Stocker said.

Maait said Egypt was due $4 billion in additional foreign funding in December, including $2 billion from the International Monetary Fund.

It also just received a half a billion from the Arab African International Bank and expected the same amount from France and Germany.

The government must also repay foreigners who have been exiting the local securities market as well as rolling over debt on the books.

Foreign holdings of Egyptian treasuries fell to $17.5 billion at the end of June from $23.1 billion three months earlier, the government said in July. Traders say even more dollars are likely to have fled since.

Egypt has some $24 billion in obligations coming due over the next two years, according to central bank data, though analysts say much of that debt is made up of low-cost loans from Gulf countries that are almost certain to roll it over.

A version of this article appeared in the print edition of The Daily Star on October 02, 2018, on page 4.




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