Egypt likely to hold off on foreign bond sale

Government will stay away from international bond market as it assesses foreign aid and budget situation, say economists

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Egypt is unlikely to tap the international bond market in the next few months despite a hefty budget deficit since political uncertainty would drive up costs and the government wants to size up what foreign aid it can secure.
The country's last eurobond, which was oversubscribed, was launched almost a year before President Hosni Mubarak was toppled on 11 February. His government had been considering a new long-term issue.
But officials now say the government, which forecasts a budget deficit of nearly 9 per cent in the 2011/2012 fiscal year, is in no hurry. Economists say it may not tap the market until November or later.
The yield on a 10-year Egyptian eurobond has dropped to 5.70 per cent from over 7.0 per cent in late January during the uprising that ousted Mubarak, as the new government has won assurances of external help to shore up state finances.
The yield was as low as 4.4 per cent last year.
Egypt was given breathing space when the International Monetary Fund agreed a US$3 billion standby facility on 6 June. That and other pledges from the United States, Saudi Arabia, Qatar and others could mount to over $20 billion, if finalised.
"I think they do have the capability to hold off for now to get the most attractive pricing," said Dina Ahmad, a strategist at BNP Paribas in London.
"It is still quite uncertain in terms of the outlook, particularly with parliamentary elections in September and presidential elections shortly afterwards."
Cairo Treasury officials speaking on condition of anonymity indicated this week that they were in no hurry to seek fresh funds from the international debt market.
"With all the funding we will receive, we may not even need to tap (the international market) for now," said one, who would not be identified due to restrictions on speaking to the media.
Egypt is not alone in deciding to bide its time. Economists say Bahrain and Tunisia, both rocked by political unrest, have delayed moves to raise fresh cash from abroad as civil strife that began in Tunis in January continues across the Middle East.
Egypt's economy shrank more than 4 per cent in the January-to-March quarter because of the turmoil, and it is battling the dual headwinds of growing public demands for subsidies and higher state wages alongside slowing tax income.
The government has cut projected spending in the fiscal year that begins on July 1 and reined in its expected 2011/12 budget deficit to 8.6 per cent from the 11 per cent targeted in a budget statement given at the start of June.
Offers of external support include a $2 billion US plan to forgive debt and guarantee bonds for infrastructure and job creation, and $10 billion from Qatar for infrastructure.
Despite the foreign pledges of support for the state budget and balance of payments, few have come to fruition for now and it could take months to get more clarity on the total.
"We believe that a big portion of international funding was actually going to materialise after the results of the parliamentary and presidential elections, which would have left a big financing gap if the government had continued with increased spending," said investment bank Beltone in a note.
Finance Minister Samir Radwan said on Wednesday that the government was in talks to raise 14.3 billion Egyptian pounds from Arab Gulf nations, the United States and the European Union, but did not give a deadline.
With key industries and inward investment likely to remain depressed, Egypt will need to find $8-9 billion to make up a shortfall in its balance of payments, JP Morgan estimates.
"You have pledges from countries not just for aid and loans, but also foreign direct investment (FDI)," said JP Morgan Middle East chief economist Brahim Razgallah. "But I don't think FDI will be fast to recover."
"Tapping the (international bond) market in these times could be challenging...It could be in November or December, once they have more clarity on their financing needs," he added.
Foreigners are steering clear of Egyptian pound-denominated Treasury bills for now, despite an increase in yields.
The yield on 182-day T-bills was 11.921 per cent when they were issued in mid-April. Bills with the same maturity issued on Thursday carried a yield of 12.791 per cent.
Economists say political uncertainty is prompting foreign investors to stay away from Egyptian T-bills for now but some could start buying again in the next three months or so.
Foreigners now hold around 2 per cent of Egyptian T-bills compared to 23 per cent in September 2010, according to another JP Morgan estimate. Official figures were not available.
Foreigners who dumped Egyptian equities when the bourse reopened after a shutdown of more than seven weeks have become more active in the market in recent weeks, traders say.
Strategists say takeover discussions focusing on Egyptian private equity firm Citadel Capital and appliance maker Olympic Group points to longer-term confidence in post-Mubarak Egypt.
The central bank has shown it can defend the currency through the economic crisis, but until the army rulers show they can conduct fair, peaceful elections and ensure a stable government, doubts will hang over Egypt's debt profile.
"Investors are in wait and see mode. They want more clarity with regard to the political outlook," said Razgallah.
He said JP Morgan had been recommending investors sell off insurance on Egypt's sovereign debt through credit default swaps because of notable improvement in Egypt's risk profile, yet "we see only gradual tightening of spreads".