Egypt’s first bond sale since uprising may cushion debt costs

Egypt’s first bond sale since the popular uprising that ousted its president in February may help cushion the country against higher borrowing costs after the year-end elections should political instability persist.

The most populous Arab country will auction two-year bonds valued at 3 billion Egyptian pounds ($504 million) on July 25, the first issuance since Jan. 18. The notes may yield 13.25 percent, according to the median estimate of seven analysts and investors surveyed by Bloomberg. The average yield at a July 14 sale of one-year treasury bills was 12.85 percent.

“The government could be trying to hedge its position in case the elections don’t provide the expected stability,” Nour Mohei-el-Din, assistant general manager for treasury at BNP Paribas Egypt, said in a telephone interview yesterday. “It’s locking in a rate that may be lower than that of future sales should borrowing costs increase after the elections.”

Egypt’s Finance Ministry has canceled sales of 19.5 billion pounds in treasury bonds ranging in maturity from three years to seven years amid the worst political crisis in three decades. The country’s reliance on short-term debt sales caused treasury- bill yields to surge to the highest levels since 2008.

Protesters Return

Next week’s sale is the first of planned auctions for a combined 22 billion pounds in two-year fixed-rate, two-year floating-rate and three-year bonds this quarter. The amount represents 15 percent of the government’s fund-raising plan for the period, with the rest coming via sales of treasury bills, according to the Finance Ministry. That compares with 19 percent in the same quarter last year. The government plans to raise 5 billion pounds at an auction of six-month and one-year notes today.

Protesters have returned to the streets in Cairo and other cities to demand faster political and economic changes, and speedy trials of government officials that served under President Hosni Mubarak for alleged corruption and the killing of protesters in the uprising. The ruling military council this month delayed parliamentary elections to October or November from September.

Egypt’s local-currency borrowing costs surged since the start of the revolt, with the yield on one-year T-bills climbing 239 basis points, or 2.39 percentage points, to a 31-month peak of 12.98 percent at an auction on June 23. The central bank canceled a sale of similar-maturity bills the following week because investors demanded yields it deemed too high. Bidders accepted lower rates at the two auctions since.
Local Lenders

The extra yield investors demand to hold Egyptian debt over U.S. Treasuries rose 28 basis points, or 0.28 percentage point, this month to 317, according to JPMorgan Chase & Co.’s Global Emerging-Market Index. Middle Eastern debt yields on average rose 14 basis points to 346, the data show.

Foreign investors sold 34.7 billion pounds of T-bills in the first four months of the year, according to the most recent central bank data, leaving local lenders to finance the country’s weekly borrowing.

The average yield on Egypt’s three-month securities surged 244 basis points to 11.934 percent since the start of the revolt. The yield on similar securities sold on July 18 by Bahrain, the Arab country that needed the help of Saudi Arabian troops to end an uprising, was 0.67 percent.
Keep ‘Foreigners Away’

The cost of protecting Egyptian government debt against default for five-years rose 18 basis points this month to 333 today, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That compares with 183 for Tunisia, the other North African country whose president was overthrown by popular uprising.

“The uncertainty around the politics and short and medium- term disturbances may keep foreigners away” from next week’s issuance, Anthony Simond, emerging markets investment analyst at London-based Aberdeen Asset Management Plc, said by phone July 19. “Even pre-revolution, foreigners were still mostly buying T-bills because the bonds were not liquid enough.”