Investor Darling Egypt Eyes Lower Debt Yields in Test for Market

CAIRO (Capital Markets in Africa) Egypt is targeting lower yields on local debt in the new fiscal year, confident that its securities will remain coveted among investors.

The goal of 15.5 percent, laid out in the 2019-2020 budget that begins on July 1, compares with the government’s yield target of 18 percent on Treasury bills and bonds in the current fiscal year. Much of the foreign capital that entered Egypt over the past couple of years came in the form of purchases of local debt, with investors drawn to yields that at one point exceeded 20 percent.

While lower yields could affect inflows by foreigners, “I think investors would like to keep decent exposure to the Egyptian market,” said Mohamed Abu Basha, head of macro analysis at EFG Hermes in Cairo. The currency’s stable outlook, “given the relatively strong external position and high foreign reserves, will still provide decent investments opportunities” even if returns from Egyptian debt are lower than some of its emerging-market peers, he said.

Battered by a selloff in developing nations last year, Egypt is now banking that investors will stick with the Arab world’s most populous nation even if returns on its debt grow more modest as long. The government set down the goals as it pushes ahead with cost-cutting measures that form the core of the next stage of an economic program backed by the International Monetary Fund.

Confident that the sweeping overhaul launched in 2016 is paying off, officials ended a mechanism late last year that allowed foreigners to repatriate their earnings in hard currency, and later announced a four-year debt-reduction strategy.

Also offering a measure of optimism was a decision by Egypt to approachJPMorgan Chase & Co. for inclusion in its emerging-market bond index. The country is also in advanced talks with Belgium-based settlement company Euroclear.

In the budget document, the Finance Ministry noted potential risks to the economy that include turmoil in neighboring Mideastern countries, as well as the possibility of interest-rate increases by the U.S. Federal Reserve.

Below are other key highlights:

• The budget statement says that if the average interest rate increases by 1 percentage point, the debt -service bill will rise by as much as 10 billion pounds ($577 million) in the fiscal 2019-2020
• The new budget is based on an average wheat price of $214 a ton, up from $184.2 this year; it assumes oil at $68 per barrel, compared with $70 this year
• The budget based on an exchange rate of 17.46 Egyptian pounds per dollar
• Targets include a real GDP growth rate of 6 percent versus 5.6 percent this year, a reduction in public debt to 89 percent of GDP from 92.5 percent this year, and a drop in the budget deficit to 7.2 percent of GDP after 8.3 percent this year
• Total revenues seen at 1.1 trillion pounds, total expenditure at 1.6 trillion pounds
• Revenue is projected to grow 17 percent, expenditure seen up 12 percent
• Total investments are estimated at 1.2 trillion pounds, 13.4 percent of overall expenditure
• The ratio of investment to GDP is set to rise to 18.6 percent versus 17.3 percent this year
• Subsidies, grants and social benefits to be reduced to 20.8 percent of total expenditure from 22.5 percent this year
• The government plans to raise 80 billion pounds by offering stakes of 15 percent to 30 percent in 23 public companies over the next 24-30 months in sectors such as petrochemicals, oil, finance, real estate and industry. The market value of those companies is estimated at 430 billion pounds