Niveen Wahish reports on the government's attempts to broaden the domestic bond market and on Egypt's international bond issue Earlier this year, Maged Shawki, head of the Egyptian Stock Exchange was asked what his hopes were for the Egyptian bourse. His reply was to go back in time to the 1920s and 1930s when, among other things, there was a thriving bond market. Back then, he said, the bond market was utilised by municipalities and governorates to fund major projects such as the Alexandria tram and the Nile Barrage in Qalioubiya (Qanater Khayria). A bond is a means by which the government and companies borrow for a period of more than one year from the market. Egypt's bond market is a fraction of what ideally it should be. According to Mustafa Assal, head of fixed income trading at Beltone Securities Brokerage, as far as government bonds are concerned, Egypt's market is 10 times smaller than similar economies. The value of tradable government bonds in the market is in the range of LE60-LE80 billion. Corporate bonds could be up to 25-50 per cent of the size of government bonds. At the moment there are only around LE12 billion in corporate bonds in the Egyptian market. The government is now trying to change that. Last week, the Ministry of Investment (MoI) issued a decree amending some provisions of the executive regulations of the Capital Market Law 95/1992 on bonds. "This comes within a plan to develop, deepen and promote the Egyptian bond market into an effective market for mobilising savings and funding companies operating in Egypt," said an MoI press release. The law enables companies to issue bonds in batches within one year of acquiring the approval of the Egyptian Financial Supervisory Authority (EFSA). Prior to this amendment, companies had to issue bonds immediately after EFSA approval, even if market conditions were not favourable. Another amendment was made earlier this year to the provisions of the executive regulations of the Capital Market Law. That amendment enabled companies to issue medium and long-term bonds by annulling a clause that had dictated that entities needed to present budget estimates for the duration of the period until the bonds mature. Since they were unable to make such long-term forecasts, they could not issue long-term maturity bonds. The same amendment also allows public service and economic authorities to issue bonds "to meet their financing needs and finance infrastructure projects to be carried out in the coming years." Not only does the amendment serve the bond market, but according to Doha Abdelhamid, professor of finance at the American University in Cairo, the amendment goes in line with the government target of rendering feasible and restructuring of the cash flows of public economic authorities (PEAs) and public service authorities (PSAs). To make these bonds attractive, Assal said, they are to be guaranteed by the government. But the market needs more. Assal said that same day settlement of transactions over government bonds is much required. Currently transactions over government bonds are settled a day later. "When you trade bonds, every day matters." If regulators do not care about this, he said, it indicates they do not care about the market. All that is necessary is a fine-tuning of existing regulations, he said. Further, Assal wants to see greater access of the average individual to the government and corporate bond market. Currently, with few exceptions, banks and institutions dominate the bond market. That, Assal says, needs to change, not only by creating awareness and marketing these debt instruments to individuals, but also by breathing life into the secondary bond market. Increasing the number of bond issues alone will not revive the secondary market, Assal said. What happens now is that bond owners keep them until maturity. Should they wish to sell them, finding a buyer is difficult, he said. Furthermore, the lack of a pricing benchmark for bonds once they are in the secondary market makes buyers reluctant. What his company is trying to do, he said, is to create such benchmarks for the LE1 billion bond issue of GB Auto that it is currently overseeing. The GB Auto bond issue closes 2 May. Nonetheless, Assal too foresees an increasing number of companies reverting to issuing bonds for financing. He said that banks are reluctant to take a risk by lending to anyone other than their traditional customers. This, he said, leaves a huge number of companies with unmet demand for financing. Furthermore, for these companies, borrowing directly from the market is cheaper than borrowing from banks, he said. Increased bond issues will likewise attract increased numbers of buyers, particularly individuals. Assal explained that corporate bonds tend to be priced higher than bank certificates due to their higher risk factor. And with interest rates on bank certificates in the range of nine per cent, corporate bonds -- at around 12 per cent -- are quite attractive. This was clear in the bond issue of Mobinil that closed end of January. The LE1.4 billion tranche of the issue offered to institutions and high net-worth investors closed 1.5 times oversubscribed. The LE100 million issue offered to retail investors closed 11.4 times oversubscribed. Minister of Finance Youssef Boutros Ghali late last week announced that Egypt has successfully issued $1.5 billion in bonds on the international market. Ghali said the issue was a booming success. According to Bloomberg, Egypt received $12 billion in orders for its bonds. The first tranche of $1 billion of the bonds priced at 5.75 per cent matures in 10 years, while the second tranche of $500 million, priced at 6.87 per cent matures in 30 years. The demand for Egypt's bonds is a vote of confidence in the Egyptian economy, according to Ghali. Experts think likewise. "International investors are not attracted by the yield alone. They have to be sure that they will be getting their money back," said Mustafa Assal, head of fixed income trading at Beltone Securities Brokerage. Egypt's bonds were rated Ba1 with stable outlook by Moody's Investors Service and BB+ by Standard & Poor's and Fitch Ratings. According to Doha Abdelhamid, professor of finance at the American University in Cairo, the risk rating and pricing is tied to a package of factors, among which are economic, political, social conditions that feed into an overall country assessment. Last week's Eurobond issue is the first since 2001. That first sovereign issue was strongly criticised for being overpriced. But Assal explains that it was Egypt's debut on the international markets and it had to come at a premium. This time around, Assal said, Egypt is also issuing 30-year bonds. Although it is a small issue of only $500 million, it is more a way of benchmarking itself and testing the market in case it needs to tap into it in the future, he explained. The pricing of the bonds this time around, according to Abdelhamid, was fairly favourable considering Egypt's risk rating. However, she pointed out that the pricing was the result of currently low overall pricing in the international financial markets, due to the global financial crisis. The government has said the revenue from the bonds will be used for general funding purposes. And although it has not been explicitly stated, the bond issue could be used to finance the Egyptian government budget deficit. The budget deficit for 2009/2010 is expected to reach 8.4 per cent of GDP and is forecast at 7.9 per cent for the upcoming fiscal year. Traditionally, the government has financed the deficit from the domestic market, thus inflating its local debt. But experts have called on the government to revert to external borrowing to ease domestic debt. Abdelhamid believes external borrowing "is a sedative for the budget deficit. It is not a panacea." Why should the government revert to international money markets rather than the International Monetary Fund (IMF) for funding? Abdelhamid explains that borrowing from the market is more favourable in terms of the cost of funds. Furthermore, she explained that borrowing from the IMF is used for buoyancy measures in the case of financial crises. Comparing this sovereign bond issue with that of 2001, Abdelhamid marks two differences. First, the international financial market was booming in 2001; second, the issue was for a clear-cut purpose -- to debut an Egyptian benchmark bond in international financial markets. Other issues were supposed to be rated according to this benchmark. This should have enhanced Egypt's profile, worthiness and rating in international markets and encouraged the issuance of a variety of bonds tied to this benchmark. "The purpose was definitely not to finance the budget deficit, it was actually visionary. The proceeds of the 2001 debt were used to finance foreign currency generating domestic projects in order to enable Egypt to repay its debt comfortably without having to find recourse to debt to finance its borrowing." Abdelhamid sees nothing wrong with international borrowing. The option of domestic versus international borrowing is normally based on risk exposure, timing and pricing of local and international borrowing in the overall government portfolio, she explained. With that in mind, she says, Egypt is in a comfortable situation to borrow internationally as long as there is sufficient demand on its issue and pricing is favourable. However, Abdelhamid warns that the government ought to be cautious on the redeployment of funds, finding feasible projects. She pointed out that the financial aspect of reform in Egypt is enormous, including everything from national projects, such as a nuclear power plant, to expanding development in Sinai, building gold plants, upgrading slums, and vertical and horizontal expansion beyond the Nile Valley.
