Protests turn ugly, and so do Egypt's borrowing costs

Jan 31, 2011 @ 1:39 pm

Egypt's plan to raise 4 billion ($683 million) Egyptian pounds this week at debt auctions was disrupted after protests rocked the North African country, forcing the government to close banks and the stock market.

The government sold 2.5 billion pounds of 182-day bills in an auction on Jan. 27 as yields jumped 40 basis points, or 0.4 percentage point, from the previous sale to a one-year high of 10.6 percent, according to data compiled by Bloomberg. The Arab world's third-largest economy delayed two debt sales scheduled for yesterday.

Reduced demand for Egyptian debt may harm the government's ability to meet its target of cutting the budget deficit to 3 percent of gross domestic product by 2015. The gap widened to 8.1 percent in the fiscal year that ended in June from 6.9 percent in the previous 12 months. The yield on the government's $1 billion of bonds due in April 2020 rose 38 basis points to a record 6.97 percent today, according to data compiled by Bloomberg.

“When Egypt decides to go out in the market you will see less appetite,” John Sfakianakis, the Riyadh, Saudi Arabia- based chief economist at Banque Saudi Fransi, said in a telephone interview yesterday. “It's going to cost the government a substantial amount in spreads as political risk has hit the roof.”

Moody's Rating

Moody's Investors Service lowered Egypt's credit rating, the first downgrade since protests began last week demanding President Hosni Mubarak's ouster. The government's bond ratings were cut one level to Ba2, the second highest junk ranking, from Ba1, the agency said in a statement today. The outlook is negative.

Unrest that started on Jan. 25, after an uprising in Tunisia led to the overthrow of the nation's president, pushed down Egypt's EGX 30 stock index 16 percent last week and sent credit default swaps surging to the highest level in more than 18 months. Egypt's leader responded Jan. 29 by appointing a deputy for the first time in his 30-year rule.

Banks will remain closed for a second day and the central bank will evaluate the security situation on a daily basis before deciding to open, Hisham Ramez, deputy central bank governor, said in a telephone interview yesterday. Debt sales will be delayed until work resumes, he said. The country has $36 billion in reserves, central bank Governor Farouk El-Okdah said in a telephone interview Jan. 29.

The government had planned a sale of 1 billion Egyptian pounds of 91-day maturity bills and 3 billion pounds of 273-day maturities bills yesterday, according to data compiled by Bloomberg.


“Any auction in the current context is bound to be a failure,” said Dubai-based Ahmad Alanani, the head of Middle East fixed income sales at investment bank Exotix Ltd. “The central bank is in no need to raise funds and pay more. Banks would also rather hang on to their cash and remain liquid.”

The central bank has “enough ammunition and reserves” to cover short-term maturities for at least another one to three months, he said.

Banks “are very liquid,” with an average loan-to-deposit ratio of about 53 percent, Mohamed Barakat, chairman of state- run Banque Misr and head of the country's banking association, said in a telephone interview yesterday.

Thousands of demonstrators gathered yesterday in central Cairo for a sixth day of rallies after a night of looting and gunfire. As many as 150 people have been killed in the unrest, Ibrahim al-Zafarani, head of the rescue and emergency committee at the Arab medical union, told Al Jazeera television yesterday.

Living Standards

Mubarak's appointment of Omar Suleiman, the country's intelligence chief as vice president, and his naming of former air force commander Ahmed Shafik as prime minister may not be enough to placate protesters as they put former military officers in the top three jobs in the country.

The protesters want an end to corruption, repression and an improvement in living standards in the nation that relies on tourism, revenue from the Suez Canal and overseas investors for foreign currency.

Dubai's DFM General Index dropped a third day, weakening 0.6 percent today. The MSCI World Index lost 0.4 percent. Egypt's bourse will remain closed for a second day today.

Default Swaps

Egypt's five-year credit default swaps rose 3.5 basis points to 432.5 today, the highest since April 2009, according to prices from CMA, a data provider in London. The jump makes Egypt's debt riskier than that of Iraq, a country still recovering from the U.S.-led invasion, whose contracts trade at 336.

Egypt has the equivalent of $46.8 billion in debt maturing this year, most of which is short dated, according to data compiled by Bloomberg. Fitch Ratings revised on Jan. 28 the outlook on Egypt's BB+ rating to “negative” from “stable.”

“One would imagine that risk premium would increase, not only because of the domestic unrest, but people will start to raise questions on fiscal implications,” Ann Wyman, the London- based head of emerging markets research for Europe at Nomura Holding Inc., said in an e-mailed response to questions yesterday. “There will be a negative impact on the budget.”

--Bloomberg News--


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