Egypt’s Eurobond issuance brings cautious optimism

Sunday 12/02/2017
An Egyptian bank employee counts euro banknotes in Cairo.(Reuters)

Cairo - Egypt’s success in raising $4 billion from issuing Eurobonds reflects inter­national investors’ confi­dence in Cairo’s economy and reform measures but should not blind financial policymakers to growing foreign debt and the need to attract direct investment, ex­perts said.

“Demand for the bonds was far higher than we initially cam­paigned for,” said Deputy Finance Minister for Monetary Policies Ahmed Kojak. “This shows that in­vestors have strong confidence in our economy and the reform meas­ures we are taking.”

Egypt set a target of $2.5 billion in bond sales in January but received more than $13.5 billion in orders and ended up raising $4 billion. The bonds were issued in 5-, 10- and 30- year tranches.

The high demand was attributed to economic reforms, which in­clude a free flotation of the Egyp­tian pound and a significant slash­ing of fuel, water and electricity subsidies.

The pound flotation in November sought to eradicate a thriving for­eign currency parallel market and boost foreign currency reserves, which had fallen to $16.4 billion.

The reforms helped Cairo secure $12 billion loan from the Interna­tional Monetary Fund. Egypt re­ceived $2.75 billion from the IMF in November. It is to receive another $1.25 billion in the second quarter of 2017.

The Finance Ministry in Novem­ber secured $2 billion in sovereign bonds through listing on the Irish Stock Exchange as Cairo stepped up efforts to secure stable foreign currency reserves.

Egypt’s financial gap is estimat­ed at $35 billion over three years, ending June 30th, 2018, the Fi­nance Ministry said.

Kojak ruled out another treasury bond issuance in the current fiscal year. He, however, said the latest issuance should improve Egypt’s financial rating.

“It will also contribute to attract­ing investments and boosting the local economy,” he said.

Some financial analysts said they shared Kojak’s optimistic out­look but also warned against what they describe as the “borrowing spree”, saying it could have disas­trous consequences.

“This unrelenting borrowing does nothing but add pressure on the state budget,” said economist Zohdi al-Shami. “Day after day, our economy will be incapable of meeting the needs of development and repaying these debts.”

Egypt’s public debt totalled $173 billion at the end of Septem­ber 2016 and foreign debt stood at $60.153 billion, the Central Bank said. Debt services totalled $9.8 billion in the July-November 2016 period, Finance Ministry data showed.

The IMF forecast Egypt’s foreign debt to reach $94.9 billion by the end of June 2019 and $102.4 billion by the end of June 2021.

The state budget deficit declined to 3.3% — $5.7 billion — of gross do­mestic product (GDP) in the first quarter of the fiscal year that be­gan on July 1st, Finance Ministry data showed.

The government said it would target a state budget deficit of 9.5% of GDP, down from 12.2% in fiscal year 2015-16. It also eyes reduction of sovereign debt to 94% of GDP, down from 98% at present.

Wages and sovereign debt ser­vices accounted for 62.7% of the government’s spending from July 1st-October 31st last year, the Fi­nance Ministry said.

Sami Khalaf, the head of the public debt unit at the Finance Ministry, said these figures should not be cause for worry.

“So far, debts are within safe lim­its,” Khalaf said. “We should start to worry only if these debts keep rising, which is why we should not totally depend on borrowing.”

To keep the lid on growing debt, economists said, Egypt needs to focus on attracting direct invest­ments.

“This will never happen un­der current conditions,” said Suzi Nashed, an economics professor at Alexandria University. “We need to work hard to make our investment climate more attractive to foreign investors.”

Egypt attracted $6 billion in in­vestments in 2016 but that invest­ment volume was dwarfed by huge national job creation and econom­ic development needs, economists said.

The country’s new investment law offers attractive incentives, in­cluding free plots of land and easy registration. Egypt has been striv­ing to attract investment in target­ed areas, including the Suez Canal region, which is seen as a potential international investment hub.

Nashed said Egypt’s major chal­lenge would be to attract invest­ments and scrap its borrowing policy.

“This is important if we really want to reduce pressure on the state budget and not add new bur­dens on it,” Nashed said. “True, borrowing brings in easy and quick money but its cost is so high.”