Egypt riskier than Iraq with debt among world’s costliest to insure

Bloomberg

Cairo

Egypt’s failure to elect leaders almost nine months after the army seized power is making the nation’s debt among the world’s costliest to insure, even as yields fall to levels not seen since 2012.

The cost of insuring the North African country’s dollar- denominated bonds for five years using credit default swaps is at 465 basis points, the most in the Middle East and among the top 10 in the world, according to data provider CMA. That compares with 243 at the end of 2010, before popular protests toppled Tunisia’s Zine El Abidine Ben Ali, fueling Egypt’s own uprising days later. The rate compares with 349 basis points for war-torn Iraq.

“We’re still a bit uncomfortable with Egypt,” Benoit Anne, London-based head of emerging-market strategy at Societe Generale SA, said by phone last Tuesday. “I’m not quite sure we’ve seen a credible policy framework for the economy put in place yet, and it’s too early to decipher the political picture.”

Neither presidential nor parliamentary elections have been set since the army stripped the Muslim Brotherhood of power in July, stretching a plan that allowed for at least one of the polls to be called in as little as five months. While increasing political stability helped cut bond yields, the government is expected to miss growth and budget-deficit goals in the current fiscal year, Finance Minister Hany Kadry said, as liabilities mount and the economic outlook worsens.

Egypt faces $3.7bn of external debt repayments in the second half of the year, according to a March 13 report from Bank of America Merrill Lynch. That is 21% of the country’s current net international reserves, which cover about four months of imports.

The government “is still struggling to access foreign currency and there’s still probably a relatively high risk that Egypt might not be able to service its foreign currency debt at some point in the future,” William Jackson, a London-based emerging markets economist at Capital Economics Ltd, said by phone on Thursday.

Some Gulf countries have stepped in with about $15bn in aid since the army’s takeover to ensure Egypt meets its obligations. An expected presidential bid by Defence Minister Abdel-Fattah al-Sisi assures Egypt of potential further Gulf Co-operation Council assistance if needed, Bank of America Merrill Lynch Economist Jean-Michel Saliba, said in the note.

Egyptian swaps, which are relatively illiquid, have tumbled by half since reaching a record 925 basis points before Mursi’s ouster. In the six months ending in February, the contracts saw an average of five trades per week covering about $23mn of debt, according to Depository Trust & Clearing Corp data. That compares with 156 trades a week covering $1.3bn of South African debt in the same period.

The military-backed government has failed to boost growth even after announcing more than 60bn Egyptian pounds ($8.6bn) of spending on higher wages and projects to jump start the economy.