Egypt: ‘Illogical’ Market Demands

Are Egyptian government debt instruments becoming less appealing to foreign investors

The Ministry of Finance cancelled a five- and 10-year treasury bond sale of a total value of LE3.5 billion ($195.4 million) for the second time this week due to banks and other investors requesting higher interest rates. The ministry had earlier cancelled another tender on 9 July.

“We have been affected by the turbulence the emerging markets are witnessing worldwide,” said Riham Al-Desouki, an economist. “Investors abroad are worried about investing in short-term debt instruments in emerging markets.”

Demand for debt instruments in Egypt “in the form of bonds and treasury bills has decreased in the past few months compared to the period following the floatation of the pound” in late 2016, she said.

The central bank data showed that foreign investors sold LE 29.9 billion worth of Egyptian treasuries in June on the back of the emerging markets problem.

The demand on Egyptian T-bills has slowed down since April, impacted by the wider emerging markets sell-off “Foreign investors already have high levels of investment in this kind of instruments, which explains their decreasing appetite for them.”

It was unclear whether the Ministry of Finance and Central Bank of Egypt (CBE) would re-offer the bonds at private auction, as it had done the week before when the National Investment Bank bought the bonds at a private auction, according to Reuters.

“Egypt aims to reach an average interest rate on government debt instruments in the current 2018-2019 budget of about 14.7 per cent compared with 18.5 per cent in fiscal year 2017-2018, which ended on 30 June,” Reuters reported.

One banker who spoke on condition of anonymity said “it was logical on the part of the government to cancel the tenders because of high interest rates.”

He told Reuters, “how can the government buy at those rates for 10 years? We want to reduce the budget deficit rather than increase it. It is best to focus on treasury bills in the upcoming period.”

According to Reuters, “Egypt’s funding needs in the 2018-2019 fiscal year are about LE714.637 billion, of which LE511.208 billion should come from domestic debt instruments and the rest should be external financing from bond issuances and the International Monetary Fund loan.”

Last week minister of Finance Mohamed Maait said limiting borrowing tops Madbouli’s government priority list.

“One of the ways is to put a limit on what you’re going to borrow, internally or externally. You want to grow, you want to finance the growth, so either you have enough funds for your growth or you’re going to have to borrow. … We will send the government within weeks a plan to manage the public debt, including putting a cap on external borrowing,” he told Reuters.

Maait , talking in the 23rd EuroMoney Egypt Conference last week stressed that the cancellation of the 4 September tender had been the result of “risks associated with emerging markets”, adding that “foreigners’ demand for government debt instruments is not declining.

The reason for requesting higher interest rates at the cancelled tender was the events taking place in Turkey and Argentina.”

The Ministry of Finance released a statement saying that the requested interest rates were “illogical” and that “they do not reflect the country’s good economic and financial performance nor its improved credit ratings.” The auction was cancelled to prevent the treasury from shouldering unjustified three- or seven-year debt servicing.

Bankers who participated in the 4 September auction had requested rates ranging between 18.5 and 18.6 per cent, according to Reuters. The crisis within the ranks of the world’s emerging markets has led Argentina to raise interest rates to 60 per cent. MSCI indicators, a set of indicators of stock-market performance maintained by investment bank Morgan Stanley, for emerging markets have dropped by eight per cent, and the Turkish lira has lost 37 per cent of its value since the beginning of the year.

Omar El-Shenety, managing director of Multiples Group, an investment firm, said that “investment funds are retreating from emerging markets, preferring to invest in the US market. This has negatively affected emerging markets such as Turkey, Argentina and Nigeria.”

Foreign investments in Egyptian government debt instruments since the floatation of the pound in November 2016 and until the end of July 2018 had reached $17.5 billion.

El-Shenety believes the CBE will try to maintain the present exchange and interest rates at the same levels until the end of the year.