While governments may not be the best authority on investment these days, government bonds are still a safe bet for reticent investors looking to add low-risk assets to their portfolio. Despite current problems, Egypt s market conditions have been favorable to bond investments as a result of easing inflation, shifting interest rates and healthy liquidity. Egypt s government bond market has developed rapidly during its short lifetime. The government has issued bonds in Egyptian pounds since 2007 and in foreign currencies, including a series of Eurobonds, beginning in 2001. In recent years, a number of steps have been taken to expand the market - a project that has become more urgent as a result of 2008 s rapid jumps in inflation and increasing budget demands due to public sector pay increases. Egyptian Finance Minister Youssef Boutros-Ghali has encouraged legislation to end tax exemptions on government bonds, hoping to create more revenue from the sale of these assets to investors. In addition, the finance minister has begun the process of registering with both the US Security and Exchange Commission (SEC) and Euroclear in order to have access to the American and European bond markets. Egyptian officials have also been working closely with international financial institutions to further develop the country s bond market. In February 2009, Egyptian Investment Minister Mahmoud Mohieldin met with World Bank officials to discuss ways to raise revenue for development projects by building up the local bond market and increasing connections with international investors. Indeed, the bond market seems to be at the top of the government s financial priority list during this time of both shrinking revenues and increasing demands from the population for expanded services, salary increases and development projects. The beauty of government bonds is that they are both a solid investment, accessible to investors on both local and international markets at prices as low as LE 100, as well as a large source of revenue for the government. They work essentially like loans: investors purchase bonds from the government, which promises repayment of the initial purchase sum plus interest over a fixed period of time. Bonds are generally viewed as low-risk assets because they involve no credit risk on the initial payment. Bonds are attractive to a certain investor profile. Someone looking for a low risk investment with good returns is likely to make bonds a foundation of their investment portfolio. While they have less potential for the large returns you might see in stocks or commodities, they also have almost no risk, explained Ahmed Mokhtar, head of fixed income and money markets at Beltone Asset Management. The risks associated with investment in government bonds are very few as the government has recourse to tax revenues to redeem bonds once they reach maturity regardless of the government s real financial standing at the time of payout. One risk associated with government bonds with particular resonance in Egypt, however, is inflation. High inflation rates have the ability to severely impact the purchasing power of bond returns over time. While some governments issue inflation-indexed bonds to protect investors from the effects of inflation, Egypt s standard government bonds do not. The government s foreign currency bonds, however, can be redeemed in US dollars as well as Egyptian pounds, an option which can help offset some of the value losses incurred by high inflation. In the past, bonds have not been a strong investment due to Egypt s rampant inflation. Now, however, inflation has eased and stabilized to the point where it doesn't interfere with bond revenues, noted Mokhtar. Foreign investors may also face the risk of currency devaluation; if the value of the currency the bond is issued in weakens over time in comparison to their home currency, foreign investors will receive lower returns when their bond reaches maturity and the returns are exchanged from a stronger currency to a weaker one. Despite some risk, investing in government bonds is prudent, especially in financially difficult times, because of the healthy, predictable returns associated with them. Government bonds are risk-free inasmuch as the investor is guaranteed back their initial nominal payment and a fixed rate of return over time. Although the real value of this rate of return can be impacted by interest rates and inflation, there is essentially zero risk to the investor of actually losing their initial investment. In general, Egyptian government bonds continue to be a healthy investment promising good rates of return with little risk. Despite the problems happening right now, there is still good liquidity in the market and movements in interest rates are providing for good capital gains, said Mokhtar. According to Mokhtar, return rates over the past five years have been between 8.75 and 8.80 percent, but have come down recently due to rising interest rates which have impacted the bond prices positively and capital gains negatively. Despite this, he expects to see improvements in the near future. I think we can expect to see interest rate cuts and decreasing inflation which will lead to capital gains over the long term, he said.
