Egyptian banks hesitant to lend to government

Questions are being raised over Egypt's ability to finance its budget deficit amid signs of investors' reduced appetite for once in-demand government debt

If you don't borrow from them, we won't lend you money.
"Them" refers to international institutions, "we" refers to local banks.
That's the ultimatum the government seems to be facing ever since the Minister of Finance announced Egypt would not need the international loan it was offered.
On Thursday, the government cancelled an auction of treasury bills due to the high prices demanded by banks. The maximum rate offered was 13.6 per cent on the short-term debt obligation backed by the Egyptian government with a maturity of 9 months, which averaged a yield of 12.952 per cent.
But this doesn't reflect any fear of the government's defaulting, say analysts. Rather, banks are hedging for concentration risk rather than for the government's default risk, believes Simon Kitchen, a strategist with EFG Hermes.
"Local banks' balance sheets are currently crowded with governmental debt which incites banks to raise interest rates to make up for the increased risk," he says.
The average yield on the country's one-year bills has surged by 2.54 per cent, compared with the last pre-revolution auction, to reach 12.982 per cent, the highest level since November 2008.
Hani Genena, chief economist at Pharos Securities thinks foreign investment institutions are reluctant to invest in Egypt's debt, leaving local banks on their own to satisfy the appetite of the country's deficit-burdened budget.
"Foreigners comprised around 25 per cent of local debt purchases in September, now they take up less than 1 per cent," Genena explains.
"They are weary of the foreign exchange risk, where the Egyptian pound would lose value, especially with depleting international reserves and a growing balance of payment deficit."
T-Bill net issuance in the first 11 months of the 2010/11 fiscal year has reached its highest ever levels -- LE113 billion -- pushing interest rates upwards.
The government has been selling fewer T-bills than it has offered in recent auctions. On Sunday, it asked for 91- days bills worth LE2 billion yet only sold around LE1 billion. It sold them at average yields of 12.112 percent, up from 12.095 percent the week before..
Worries about debt service increase
The growth in governmental borrowing has fuelled worries about a sustained increase in debt service in the budget.
Local debt service in the first 11 month of 2010/2012 reached LE72.7 billion; around 23 per cent of total expenses.
March 2011 figures indicate that local debt constitutes the bulk of Egypt's debt at LE890 million versus LE208 million for foreign debt. This is reflected in debt service where local interest payments amounted to LE69.4 in May 2011.
"We have not reached a risky level yet. Many countries have survived times of excessive borrowing as long as investors still have confidence in the governments' ability to repay its debts," says Magda Qandil, director of the Egyptian Center for Economic Studies.
Qandil says the government should start curbing expenses and boosting revenues so as to be able to service its debt and retain its credibility with investors. ''[With no credibility,] no interest rate would suffice to compensate for the heightened risk of lending the government … we would be where Greece is currently at," she says.
Egypt last week declined a US$3 billion IMF loan, following a significant cut in 2011/2012 budget to reach 8.6 per cent down of GDP from the initially proposed 11 per cent.
The Minister of Finance, Samir Radwan, announced that Egypt will not need external borrowing as it will be able to raise the required funds through local lending and foreign aid.
This is a challenge that's looking harder by the day.