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| 08 October, 2018

Going, going, gone: Egypt cancels bond auctions as it tries to squeeze interest rates

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Great Sphinx and Pyramid of Khafre

Great Sphinx and Pyramid of Khafre

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Egypt launched its latest funding roadshow in Seoul yesterday, as officials pin their hopes on Asian investors being more receptive to signing up to the country’s international bonds, especially after the interest rates offered in recent weeks have not been to their liking.

The North African state is looking to sell around $5 billion in Eurobonds, possibly in the first quarter of 2019, Finance Minister Mohamed Maait said last month, according to a Reuters report on Sunday.

However, Egyptian authorities face some tough conversations as they launch the Asian leg of the funding roadshow. Egypt’s finance ministry last month cancelled four consecutive auctions of 5 and 10-year treasury bonds after it could not agree terms with investors.

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Banks and investors have been angling for interest rates of between 18 and 18.5 percent, while Egyptian authorities are pushing for levels of around 14 to 15 percent.

While the latest weekly auction on October 1 did go ahead, the rates on the 3-year and 7-year bonds were more in line with what investors demanded and were 18.432 percent and 18.431 percent, respectively.

To add to their problems, ministry officials were also faced with the fact that while the 3-year bonds were sold they were only able to sell 153 million Egyptian pounds ($8.54 million) of the 7-year bonds, well below the 500 million Egyptian pounds they had been hoping for, according to an NBK report issued on Sunday. (Read the full NBK report here).

“The Ministry of Finance had argued that the requested interest rates for the bonds exceeded the acceptable limits and did not reflect the good economic and financial performance or even the improvement in Egypt’s credit rating, and these rates were not warranted by the level of risk in Egypt,” NBK said in its report.

The interest rate is a critical issue for Egypt as the emerging market crisis has severely impacted its financial position. According to state budgets, interest payments are predicted to grow to around $30 billion in the current fiscal year ended in June and will account for 38 percent of total expenditure and 70 percent of tax revenue.

“The finance ministry estimated that for every 1 percentage point increase in average rates the debt service bill will rise by 4-5 billion Egyptian pounds,” according to the NBK report.

So why are investors reluctant to accept lower interest rates? NBK put the cause down to a rise in risk aversion as a result of ongoing concerns over the trade war between China and the United States and the crisis in emerging markets.

“In the present environment, investors are likely to ask for higher interest rates and a larger margin over the prevailing inflation rate. This is more the case at a time where global interest rates are on the rise and where investors think, justifiably or not, that emerging market contagion could put pressure on what is now a flexible exchange market,” NBK said in its report.

The news comes at a tough time for Egyptian authorities as they try to turn the economy around. While Egypt's tourism revenue jumped 77 percent in the first half of 2018 and more than 1,400 active construction projects worth $348.2 billion are underway, other economic indicators have not been so positive.

Reuters reported that Egypt's non-oil private-sector activity shrank last month to its lowest level in nine months, while foreign direct investment (FDI) in the country’s non-oil economy fell in the second quarter to its lowest levels since authorities agreed an austerity plan with the International Monetary Fund (IMF) two years ago.

At the same time, the country’s equities market was the worst performer in the region last month, dropping 8.7 percent during the month of September. At one stage this year, the Egyptian Exchange was the strongest performer in the region, but it is now 3 percent lower in the year-to-date, dragged down by the sharp September drop.

While analysts at EFG Hermes told Zawya they remain positive on the Egyptian index’s outlook in the medium and long-term, their opinion was not reflected in a Reuters poll of 13 leading fund managers, conducted at the end of September, which showed that 31 percent of participants expect to cut allocations to Egypt in the next three months, the most negative balance since February 2017.

Further reading:
GCC equities review: Emerging markets worries weaken Egypt's index
Middle East funds less positive on equities, particularly in Egypt
Egypt's non-oil business activity weakens in Sept - PMI
Egypt's current account deficit narrows sharply to $6bln in 2017-18
Foreign investment in Egypt falls, austerity plan hurts demand
Egypt's tourism revenue jumps 77% in first half government - official
Egypt construction sector riding on $348bln projects

(Writing by Shane McGinley; Editing by Michael Fahy)
(shane.mcginley@refinitiv.com)

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