CAIRO - Egypt's attempts to lower borrowing costs and spur economic growth are stumbling because the country's banking sector is loath to allow rival players into the lucrative treasury bond market. The government, which has been trying for years to expand debt markets that lag far behind its equity markets in size, said in September it had almost completed a new legal framework for bond trading. Egypt has been attracting increased interest from emerging market investors because of its sturdy growth, heading toward 6 per cent a year, despite a cloudy global outlook. Investors have also been lured by high local bond and T-bill yields compared to US and other more developed markets. That growing appetite has created an even more pressing need to make its securities market more liquid, analysts say. But the 15 commercial banks that have the sole right to buy treasury bills and bonds directly from the government are unlikely to easily give up a cozy arrangement that allows them to sit on easy and risk-free sovereign debt. Because it is hard for investors to resell securities on Egypt's thinly-trading secondary market, the government must pay a risk premium on its debt, leaving it less money for domestic spending that could spur the economy. "It's not difficult to fix it. There is a blueprint out there, and they just need to press the button," said Ahmed Alanani, director of fixed income sales at Exotix in Dubai. "What disappoints me is that similar reform measures were taken by other countries such as Turkey and Malaysia, which have a similar macroeconomic picture, except they now have a far more developed fixed-income market than Egypt ever could," he said. Egyptian treasury bills have become more attractive to foreigners, who have taken advantage of a flood of cheap dollars to buy Egyptian government paper through the 15 commercial banks. The yield on T-bills has been around 9 or 10 per cent. Foreign treasury bills holdings soared to 64.8 billion Egyptian pounds ($11.2 billion) in September from 10.2 billion pounds in September 2009, according to central bank statistics. The foreign purchases has helped the government finance its large deficit without crowding private borrowers out of the market. The deficit reached 8.1 per cent of gross domestic product in the year to the end of June. Despite a surge in demand, analysts said the government has had to pay a higher yield, or an illiquidity premium, on the securities they offer because of the difficulties investors face if they want to sell the instruments before maturity. Analysts say an active secondary market for government paper could also encourage corporate bond issues. Only a handful of Egyptian firms - Mobinil, Ezz Steel, GB Auto and Orascom Construction Industries (OCIC.CA - have bonds outstanding, and these trade infrequently. One official said Egypt's conservative central bank is among the actors least interested in changes to the present system.
