A good start: Bonds

 

Outline

In November 2016 the executive board of the IMF approved a three-year, $12bn loan under an Extended Fund Facility (EFF) aimed at boosting the economy. According to a September 2017 IMF staff report on the aims of the development programme, the loan instalments are contingent on the government acting to tighten Egypt’s fiscal position, improve the business environment and liberalise the economy. Crucial goals of the EFF include the liberalisation of the exchange rate; elimination of the parallel market; stabilisation of the Egyptian pound; and containing inflation through monetary tightening, which largely affected the issuance of domestic bonds in 2017. Tapping the international bond market to finance the external funding gap was also a key feature of the IMF’s programme, influencing the government’s plan of international issuances.

Since the approval of the EFF and the flotation of the Egyptian pound on November 3, 2016, the Central Bank of Egypt’s (CBE) Monetary Policy Committee has raised key interest rates by a total of 700 basis points (bps). Accordingly, the average duration of government debt instruments has decreased, with the government issuing more short-term Treasury bills (T-bills) and fewer longer-term bonds.

One year following the flotation , bonds comprised less than 5% of the total issuances by the Treasury, while international participation in Egyptian pound debt regained steam, exceeding record highs from 2010 in local currency terms. Foreign holdings of T-bills reached approximately LE331bn ($21.8bn) as of November 7, 2017.

On the international front, the government raised $7bn from two separate bond issuances in 2017. In January 2017 Egypt raised $4bn in its triple-tranche international eurobond offering in North America, Europe, Asia and the Middle East, attracting orders of around $13.5bn. The five-year tranche was marketed at 6.125%, the 10-year tranche at 7.5%, and the 30-year tranche at 8.5%. In May 2017 Egypt tapped $3bn from the international debt market by reopening subscriptions in five-, 10- and 30-year dollar-denominated eurobonds. Due to improved sentiment, in May 2017 the government sold five-year bonds worth $750m at an average yield of 5.45%, 10-year bonds worth $1bn at an average yield of 6.65%, and 30-year bonds worth $1.25bn at an average yield of 7.95%, with a total coverage ratio of four times. Approximately 80% of the money raised came from North America and Europe.

Projection

Also included in the IMF staff report was its first review of Egypt’s economic reforms supported under the EFF. According to the review, Egypt made a “good start” with its reform programme, in which all the quantitative performance criteria were successfully met. Egypt’s perceived risk has largely dropped, with the five-year credit default swap down over 100 bps since the flotation . Additionally, market yields are currently pricing-in the expected start of an easing cycle, made evident by dropping interest rates with 12-month T-bill yields, which fell more than 400 bps from their highs in mid-2017 to pre-flotation levels. The IMF also hinted in its September review that as inflation eases, interest rates should start decreasing.

With the cost of domestic and international debt expected to drop over the coming year, the government has consequently approved the issuance of eurobonds worth $5bn to $7bn during the first quarter of 2018 as part of its FY 2017/18 international bond issuances. This came after it had approved a new $10bn international bond scheme, as it has already utilised some $8.5bn out of the $10bn programme currently in place.

In the domestic government bond market, as yields on Treasury bonds drop, the government could increase the average duration of its domestic debt by issuing more bonds and reducing T-bill issuances.

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