Foreigners Lapping Up Egypt’s Growing Supply of Cheap Debt

CAIRO (Capital Markets in Africa) – A flood of new issuance is offsetting foreign-investor demand for Egyptian debt, keeping yields among the highest in emerging markets.

Offshore investors boosted holdings of government Treasury bills to 79 billion pounds ($4.4 billion) as of April 4, compared with less than 1 billion pounds before a currency devaluation in November, according to Finance Ministry data. Government borrowing is already 11 percent higher than the target this year, and 18 percent over budget since the beginning of March, according to data compiled by Bloomberg.

Yields on Egyptian debt are the highest among 31 nations in Bloomberg Emerging Market Local Sovereign Index even as the cheaper pound attracts much-needed dollars from abroad. That presents a dilemma for policy makers in Africa’s third-biggest economy, which faces a widening budget deficit and growing debt pile that is costing more to service as it tries to shield tens of millions of people living in poverty from inflation that has surged to more than 30 percent on an annual basis.

“You cannot adopt inflationary reforms such as floating the currency and cutting subsidies while consolidating your budget at the same time,” said Hany Farahat, an economist at Cairo-based CI Capital Holding who expects the budget deficit to exceed 12 percent of gross domestic product this fiscal year, compared with the government’s target of 10.7 percent. “There must be a trade-off.”

‘Temporary Side-Effect’
Egypt sold T-bills ranging in maturity from three months to one year last week at average yields of more than 19 percent. The pound traded at 18.0872 per dollar as of 3:51 p.m. in Cairo, 51 percent weaker than before the devaluation on Nov. 3.

International funds, which had shunned the country’s debt securities in the years following the 2011 uprising that ended Hosni Mubarak three decades in power, held 3 percent of Egypt’s T-bills at the end of January, compared with less than 0.1 percent before the currency float.

“High interest rates are a temporary side-effect, without which the pound float wouldn’t have achieved its purpose of attracting foreign capital,” Farahat said. “They’ve put Egyptian assets back on the investment map. So, for foreigners, it makes sense to rush to get a piece of the pie.”

Egypt’s financial sector has attracted $19.2 billion of inflows since relinquishing control of the pound, the central bank said in a text message to reporters Tuesday. The announcement came on the same day that the International Monetary Fund cut the country’s growth forecast for this year to 3.5 percent from an October estimate of 4 percent. The IMF agreed in November to provide the nation with a $12 billion loan after the government committed to changing economic policies.

Samy Khallaf, the head of the Finance Ministry’s public debt division, declined to comment on the increase in government borrowing.

Source: Bloomberg Business News