Al-Ahram Weekly On-line 23 - 29 November 2000 Issue No.509
Published in Cairo by AL-AHRAM established in 1875

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The big gamble

By Sherine Abdel-Razek

It will be the first time Egypt turns a brave face to the world and offers up a real test of its economic weight. It could be as soon as January that Egypt begins to issue bonds on the international market and economic analysts are sharpening their claws, ready to question the timing of the offering and the need for such a step.

It was only six months ago that the cabinet, offering its 2000-2001 budget to the People's Assembly, revealed plans to issue Eurobonds -- bonds issued and traded out of their country of origin and denominated in foreign currency. Ever since, Minister of Finance Medhat Hassanein has used every opportunity to explain why the Egyptian economy needs the Eurobond issue to cover the yawning gap between investment needs and the country's available resources. The last few months have witnessed intensive efforts by the Ministries of Finance and Economy to promote the decision.

To fulfil its targeted annual growth rate of 6 per cent, Egypt's investments must equal 25 per cent of its gross domestic product (GDP). Available local resources for investments do not presently exceed 17 per cent of the GDP and the government needs to fill this gap, either through direct investments or from the local or foreign markets. Borrowing from the local market is currently as high as 11 per cent. The situation has forced Egypt to resort to foreign markets, Hassanein explained, either by acquiring loans from international financing institutions, like the World Bank, the Islamic Development Bank or African Development Bank, or by tapping the international debt market.

The Ministry of Finance has invited 25 financial institutions to submit their proposals for the value, maturity and pricing of the offering. Only 19 proposals were accepted and are currently being studied by a committee that includes representatives from the Ministry of Finance, the Ministry of Economy and the Central Bank of Egypt. Representatives from the 19 banks then met and were briefed on the current economic situation.

How will the Eurobond be received in internaional markets ?

Preliminary estimates put the offering in the range of $500-1,000 million. But despite rumours that the bonds will hit foreign markets by the new year, very little about the Eurobond issue has been revealed, raising speculations that the government is unprepared to back up its decision. Market analysts have claimed that any date before mid-2001 will be unfavourable for the issue and some have indicated that the somewhat lacklustre state of the Egyptian economy could tarnish the appeal of the offering. One market expert told Al-Ahram Weekly that the timing will never be suitable until the government starts devaluing the pound in order to put a lid on current fluctuations in the exchange rate. Doing so would be in Egypt's favour, he noted, explaining that it would cover the differences in exchange rates between the time of acquiring the loan for the bonds and repaying it.

Alaa El-Seesi, head of research at the Egyptian brokerage firm HC Securities, agreed with the analysis. "Only two weeks ago, we postponed the offering of Telecom Egypt because we found that foreign interest in an Egyptian company -- amidst the ongoing liquidity problem and foreign exchange problems -- is not strong," El-Seesi said, noting that this will inevitably be reflected in pricing of the issue and ultimately incur higher costs.

Discussion of the offering has churned up all the discouraging factors that have been neatly swept under the rug, including the recent downgrading by two rating agencies of their outlook on the Egyptian economy. The final pricing of the offering will bear the weight of all the economy's difficulties, making the choice a sensitive one. On the one hand, the price is what will determine the Eurobond's appeal in foreign markets. The higher the interest rate paid on the bonds, the more will it attract investors. On the other hand, the Eurobond will be used as a benchmark for private Egyptian companies who may want to issue their own bonds on the international market.

So far, no Egyptian company has issued bonds in global markets, but companies who wish to do so will use the price of the government's bond to determine their own price, adding on a more attractive premium in order to entice investors to take the risk on their bond. Thus, the higher the rate of the Eurobond, the more it will cost companies to follow suit. Companies that might be interested include Ezz Steel Rebars and Lakah Group, both of which have dollar-denominated bonds traded in the local market.

Many were worried that proceeds from the sale of the bonds will actually be used to finance the 3.4 per cent budget deficit, but Finance Minister Hassanein calmed these fears by announcing that any revenues from the offering will be used for financing investments. El-Seesi noted that this reduces the risk of borrowing in dollars, as the value of the dollar to the Egyptian pound is always increasing. He explained that using the revenues of the offering in investments can generate dollar-denominated income and could in fact be in Egypt's favour.

Egypt is not the only market in the region to resort to foreign markets to gain capital for investment. Both Qatar and Lebanon have taken similar steps in the last few years. While Lebanon has mainly targeted the European markets, Qatar's two Eurobond issues were traded in the US markets as well. Market experts generally feel that European markets are a wiser choice. The fluctuation in interest rates is very tight -- only 0.25 per cent each year -- so the appeal of the fixed income bond will not be undermined.

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