Friday,20 July, 2018
Current issue | Issue 1347, (1 - 7 June 2017)
Friday,20 July, 2018
Issue 1347, (1 - 7 June 2017)

Ahram Weekly

Eurobonds encore

Egypt has reverted to the international markets once again for financing, writes Niveen Wahish

source: Bloonberg
source: Bloomberg

For the second time this year, the government has sought to procure financing from the international markets by offering dollar-denominated Eurobonds on the Luxembourg stock exchange.

The government sold $3 billion worth of five, 10 and 30-year Eurobonds at 5.45 per cent, 6.65 per cent and 7.95 per cent interest, respectively. The offering was as successful as the first which took place in January 2017.

There was demand worth $11 billion for the bonds. The highest, at 46 per cent, was for the 30-year bonds, followed by 34 per cent for the 10-year bonds. This reflects a medium- and long-term vote of confidence in the Egyptian economy and the economic reform programme Egypt is adopting, Minister of Finance Amr Al-Garhi said on television.

Moreover, this time around, Al-Garhi said, there had been an improvement in interest rates. The rates paid on May’s Eurobonds are around half a per cent less, and even more in the case of the 10-year bonds, than those paid on the January issues.

The funds raised by the bonds will go towards closing an $11 billion financing gap for the 2017-18 fiscal year, Al-Garhi said.

He dismissed worries about Egypt’s growing foreign indebtedness, saying foreign borrowing was a way of varying sources of financing instead of depending on the local market where borrowing is more expensive because of high rates.

Egypt’s foreign debt jumped 40.8 per cent year-on-year to $67.32 billion in December. This compares to around $34 billion in 2011. The minister said the money raised would also be used to pay due debts, thus freeing the country from some existing debt and propping up the foreign reserves.

Former finance minister Samir Radwan acknowledged the need for foreign borrowing, with domestic debt at around 100 per cent of GDP. That debt has become very costly, especially in the light of the recent decision by the Central Bank of Egypt (CBE) to hike rates by two per cent. It is estimated that the rate hike will add a further LE30 to LE35 billion in additional interest payments to government expenditures.

Nonetheless, he said, the low interest rates on foreign borrowing could be deceptive because it was debt that would have to be repaid in hard currency later. The dollar is currently trading at LE18.

The conundrum of the Egyptian economy is that it is not creating enough revenue and therefore must depend on borrowing, Radwan said. Getting the country’s production and export base going would need a longer time and more stability, he said, adding that the government was in a tight spot and was pressured by social demands it needed to meet.

However, it could do more to encourage closed factories to operate again, he said, stressing that the debt needed to be used to expand the production base. Using further debt to pay off existing debt and using it as a stop-gap for the budget was a vicious circle, he said.

Mohamed Abed, an associate professor of economics at Alexandria University, rebutted the argument that the government was borrowing on the international markets to reduce domestic borrowing, saying that the government was continuing to borrow avidly through treasury bills and bonds.

In fact, he said, because of the interest rate hike there had even been increased demand for treasury bills by foreign investors looking for higher yields.

Over the weekend alone, Egypt received about $1 billion in foreign inflows. Bloomberg reported that in Sunday’s sale the average yield on nine-month notes rose by 77 basis points to 20.48 per cent, and the average yield on three-month notes rose by one percentage point to 20.52 per cent.

Foreign holdings of Egyptian debt were about LE120 billion a week ago, Bloomberg reported.

But international investors look to their own interests first, Abed said. They are not investing in Egypt’s international and domestic debt instruments for the love of Egypt, but rather for high yields, he added.

Interest rate payments on domestic and foreign debt represent 31.6 per cent of total expenditure in the draft 2017-18 budget of LE1.2 trillion.

Abed does not believe the increase in the foreign reserves says much about the strength of the economy. For the reserves to be meaningful, he said, they must be free of any commitments and not consist of loans and deposits.

Abed worries about when the debt being accumulated will be repaid. The IMF estimates that Egypt’s external debt will reach $66 billion in 2016-17 and rise to reach $102 billion in 2020-21.

Traditional hard-currency earners such as tourism would not be enough to repay this debt, Abed said. Tourism brought in around $12 billion in 2010, a peak year. Since then, revenues have averaged at $5 billion.

Any new debt must be spent establishing export-oriented projects that will create value and bring in revenue, or otherwise there will always be a financing gap, Abed said.

Egypt could return to the international markets for another Eurobond issue by next year, with Al-Garhi saying it may decide to return in the second quarter of 2018.

Egypt will likely have a financing gap of over $35 billion until the 2018-19 fiscal year, according to the IMF. Egypt’s agreement with the IMF for a $12 billion extended funding facility loan is part of efforts to cover the financing gap, alongside other multilateral and bilateral funding and borrowing from the international markets.

One of the primary targets of the economic reform programme supported by the IMF is to reduce the budget deficit. It is targeted to drop to 10.8 per cent of GDP in the current fiscal year, from 12.3 per cent last year. The target for 2017-18 is to cut the deficit to 9.1 per cent.

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