Egypt's economic reform and IMF aid reshape bond and other debt markets

In November 2016 the executive board of the IMF approved a three-year, $12bn loan under an extended fund facility (EFF) to assist with Egypt’s economic reform strategy. The liberalisation of the exchange rate, elimination of the parallel market and the stability of the Egyptian pound were crucial goals of the EFF programme. Moreover, several key features of the IMF strategy had domestic implications: monetary tightening aimed at containing inflation largely affected the country’s bond issuances, while moving to the international bond market to finance the external funding gap had an impact on the government’s international bond issuances plan.

Short-Term Trend

After approval of the programme and the flotation of the Egyptian pound in late 2016, the Monetary Policy Committee of the Central Bank of Egypt (CBE) started a tightening cycle, with total hikes of 700 basis points (bps). Accordingly, the average duration of government instruments decreased, with the state issuing more short-term bills and fewer long-term bonds. Total bond issuances were fewer than 5% of the total Treasury issuances a year into the floatation. Following the pound floatation, international participation in local currency debt regained steam, exceeding 2010 highs. Foreign holdings of Egyptian Treasury bills (T-bills) reached LE413bn ($23.2bn) in March 2018 but dropped to LE210bn ($11.8bn) as of October 2018. Since then the CBE has delayed the tightening cycle in light of the current high global interest rate environment and relatively high local inflation, after it had to cut rates by a total of 200 bps in the first quarter of 2018 – 100 bps each in February and March. This led the one-year T-bill rate to increase again to 20% in December 2018 from a low of 16.4% in February 2018.

Sovereign Debt

The country has also been active in sovereign debt issuances, raising $6.3bn in 2018. In February $4bn was raised in a multi-tranche eurobond offering, including a five-year tranche worth $1.25bn with a 5.58% yield, a 10-year tranche worth $1.25bn with a 6.59% yield and a 30-year tranche worth $1.5bn with a 7.91% yield. In April €1bn was raised from the sale of eight-year eurobonds at an average yield of 4.75%, and 12-year eurobonds worth €1bn at an average yield of 5.625%. Officials are outlining a plan to issue eurobonds worth $20bn until 2022 with $5bn eurobonds – over at minimum two issuances – expected in early 2019 and denominated in currencies other than dollars and euros.

Looking Ahead

In November 2018 the IMF reached a staff-level agreement on the fourth review of Egypt’s $12bn EFF, which is subject to approval by the IMF executive board and would make available another $2bn of disbursements – bringing total disbursements to about $10bn – upon completion. According to the IMF, in the current external environment of tighter financing conditions for emerging markets, the CBE’s commitment to a flexible exchange rate policy will help enhance competitiveness, protect Egypt’s foreign reserves and cushion against external shocks. The banking system remains liquid, profitable and well capitalised; and fiscal policy in FY 2018/19 and beyond will continue to aim to keep general government debt on a clearly declining path and achieving a primary surplus of 2% of GDP. The state also remains committed to continuing energy subsidy reforms and raising revenues to invest in a well-targeted social safety net, health, education and infrastructure, the IMF added.

Also, in November 2018 the country’s Cabinet approved a new draft law modifying income tax on Treasuries, which separates income earned on Treasuries from the other income sources of corporations and banks. The amendment, if approved, will result in a higher effective tax rate paid by banks due to their Treasury holdings and will result in some LE10bn ($562m) in tax revenue to the government, as estimated by official sources. Officials are targeting issuing Treasuries worth LE511bn ($28.7bn) in FY 2018/19.