Egypt: Confidence boost for capital markets

Investor interest in Egyptian bonds and shares is on the rise as greater political stability and signs of economic recovery help stimulate confidence in the country.

Nine-month yields on Egyptian bonds were at their lowest level for almost a year on September 16 when the country sold its first floating-rate bonds, spelling good news for the government as it looks to secure international funding to help boost economic growth.

The government sold LE4.3bn ($705.3m), 273-day bills at an average 14.46%, down 1.02 percentage points, and LE1bn ($164m) of floating-rate T-bonds, yielding an average of 15.38%. At a sale held one week earlier, yields on 182-day issues fell 85 basis points to 14.25%, while the yield on benchmark 5.75% dollar bonds maturing in April 2020 dropped six basis points to 5.28%, according to Bloomberg.

In mid-September, Moody’s ratings agency confirmed its B2 rating for Egyptian government bonds. The firm said the rating was based on an improvement in political uncertainty, the stabilisation of the country’s external payments position, progress made in stabilising macroeconomic conditions and public finances, alongside the government’s formal request for IMF support.

The ratings agency noted that Egypt’s net foreign currency reserves, totalling $15bn, were more than enough to cover debt payments due over the next 12 months, while core inflation had fallen from double-digits to 5.4% in August.

Another determining factor was the election of Mohamed Morsy as Egypt’s president, which the firm said had helped stabilise the country’s political situation and bolster investor confidence. The agency warned, however, that renewed political instability, deteriorating external payments or a rise in government financing costs could all put the rating at risk.

If political calm is maintained, the economy continues its upward trend and the government works to bring down financing costs, Moody’s added, Egypt’s outlook could return to “stable” from its current “negative” rating.

Although the country still must address sizable structural issues, including official unemployment in excess of 12% and an unsustainable subsidy system, the incremental improvements in Egypt’s outlook is beginning to re-attract financial investors, as well as bonds, back to Egyptian stocks. The benchmark EGX30 index is also on the up, with gains of more than 50% this year, making it the second-best performing stock market in the world. The surge, however, followed a fall of 49% in 2011, and stocks still remain around 20% lower than pre-revolution levels. International press reports have also noted that buyers are largely Egyptian.

The protests that resulted in rioters attempting to storm the US embassy in September, combined with profit-taking after recent gains and the uncertain global economic outlook, slowed the rise in stocks during the month, although losses were minimal.

Undeterred by the disturbances, however, several international investors have indicated their plans to re-enter Egypt, with some deals, such as UK-based Silk Invest’s move to add to its holdings of Egyptian bank EFG-Hermes, already signed in August. Major construction projects in Cairo are also re-starting while a carefully managed depreciation has helped stabilise the outlook for export-oriented businesses.

The return of foreign funds to Egyptian capital markets and a move by several companies to reignite spending plans that were put on hold during the revolution should help boost liquidity in the country at an important juncture in its development. The growing presence of long-term investors should also increase the exchange’s stability, while lowering vulnerability to fluctuations caused by speculators.

A new deal with the IMF could prove pivotal for Egypt in helping to put the budget on a more even keel and boost investor confidence. It would also act as a key driver in the government’s bid to double annual economic growth from the 2.2% recorded in 2011/12 to 4%-4.5% for the current fiscal year, which runs until end-June 2013. The government hopes to finalise details of the $4.8bn loan request package to tackle budgetary and balance of payments deficits by the end of the year at the latest.

IMF officials have made it clear that any agreement should support a “home-grown” economic programme designed to strengthen Egypt’s fiscal position and shore up macroeconomic stability. The country has already secured a $2bn loan from Qatar to support the economy, which it agreed in August, alongside a deal with the US in September to provide $1bn in debt relief. It may also seek cash from the World Bank in a further bid to boost growth.

Egypt’s market fundamentals and competitive advantages, led by a large and growing population, a positive long-term GDP growth trend, resources and geographical position, strengthen its potential as an appealing investment destination. After a tough 2011, Egyptian bonds and shares may well resume a secure place on investors’ radars, should political stability be maintained and economic growth restored.