International lenders back Egypt debt, domestic yields climb

Egypt is chasing its short-term domestic market to fund ballooning Government deficits, but seems to be preparing for a new Eurobond issue to replace $1 bn in 8.75% Eurobonds maturing in July, according to Bloomberg.
A week ago, Bloomberg reported that US President Barack Obama’s May guarantee on $1 billion of Egyptian debt could cut the country’s borrowing costs, helping the transition to democracy. Bloomberg surveyed 5 fund managers and says the median estimate is that the guarantee could cut yields on the five-year debt by 200 basis points (2 percentage points) or the equivalent of $100 mn.
Yield watchers follow the 10-year Eurobond, issued at 5.75% in April 2010 and listed on the Bourse de Luxembourg. The 2020 bond price climbed at the start of June after the Government unveiled a new capital gains tax and higher corporate tax, although the news hit share prices and its yield fell 15 basis points (0.15 percentage point) to 5.66% on 2 June, the lowest since 14 January. It had peaked at 7.07% on 31 January.
The IMF has also announced a $3 bn loan and other reported backing includes a plan for a $2.2 bn World Bank loan and $4 billion in economic and budgetary aid from Saudi Arabia.
Sergey Dergachev, who helps manage the equivalent of $8.5 bn in emerging-market debt at Union Investment Privatfonds in Frankfurt told Bloomberg: “The U.S. guarantee helps to get more interest from investors and calm investors’ nerves a little bit. But underlying credit risks for Egypt are nevertheless very high.”
Bloomberg reports that Egypt is rated Ba3 by Moody’s, 3 levels below investment grade after its second downgrade this year in March. A statement on 24 May says: “Egypt suffers from deep-seated political, socio-economic challenges. These include chronic high rate of unemployment, elevated inflation and widespread poverty.” Unemployment rose to 11.9% in the first quarter this year, from 8.9% the previous quarter. Food prices have risen about 20% this year, according to the Government’s statistics agency. Standard & Poor’s rates Egypt BB.
According to a recent report on Bloomberg, the T-Bill auction on 19 June the Ministry of Finance fell 11% short of raising the EGP 6.5 billion ($1.1 bn) targeted at an auction of treasury bills. It sold EGP 3bn in 3-month bills, the highest since 13 February, and EGP 2.8 bn from 9-month bills, less than the EGP3.5 bn target. Bloomberg reports the average yield on the three-month securities jumped 16 basis points, the most since an auction on 20 April to 11.761%. The yield on nine-month bills gained 4 basis points to 12.944%.

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