Record Egypt-Tied Note Issuance Highlights IMF Loan Cheer

CAIRO (Capital Markets in Africa) – Investors are rushing back to structured notes tied to Egypt following a currency float and an International Monetary Fund loan last quarter, six years after a revolution that had scared them off.

Citigroup Inc. issued all four of the recorded credit-linked notes this month raising a total of 2.3 billion Egyptian pounds ($121 million), the most for a single month on record, according to data compiled by Bloomberg. The biggest was a one-year zero coupon security sold at about 84 percent of face value.

The deals come just as Egypt’s government raised $4 billion in international debt markets on Tuesday, its first such issuance since it floated its currency in November. The offering was oversubscribed, Finance Minister Amr El-Garhy said on Bloomberg TV, as fund managers competed to invest in Africa’s third-largest economy amid growing confidence spurred by the $12 billion IMF loan. The fund released details of the conditions on that lending last week in a report.

“The staff report from the IMF suggests things are heading in the right direction for Egypt,” said Bilal Khan, senior economist for Middle East, North Africa and Pakistan at Standard Chartered Plc in Karachi. “There’s political commitment to implement a reform program.”

Egypt’s 12-month local-currency treasury bills yield about 20 percent. Those rates and the pound’s more than 50 percent plunge since Nov. 1 to about 18.72 per dollar on Friday have attracted global fund managers, according to Richard Lancaster, managing director in emerging markets credit trading for central and eastern Europe, Middle East & Africa at Citigroup.

Attractive Yields
“Given the large recent depreciation of the pound coupled with high yields I would expect further flows to the domestic debt market this year,” he said.

Aberdeen Asset Management returned to the Egyptian bond market purchasing local treasury bills for its EM Frontier Bond Fund after the currency float, according to Imre Tajti, an investment manager at the fund.

“The country’s fundamentals remain challenging but we decided to start investing into local currency instruments again,” he said. “Our investment strategy is very opportunistic and cautious as the market is very choppy and illiquid.”

Austerity measures attached to multilateral loans are frequently unpopular among citizens and present a further risk for investors. When Sri Lanka received its IMF loan last April, a coalition of trade unions and social organizations called for more scrutiny of the pact’s measures.

“It’s safe to say there’s significant implementation risk on the fiscal side which will inevitably have social costs,” said Standard Chartered’s Khan. “The IMF program envisages cutting the fiscal deficit considerably and that involves revenue increasing measures and public expenditure cuts.”