Investor Darling Egypt Eyes Lower Debt Yields in Test for Market

(Bloomberg) -- Egypt is targeting lower yields on domestic debt in the new fiscal year, confident that its securities will remain coveted among investors.

The goal of 15.5 percent, laid out in the 2019-2020 budget that begins on July 1, compares with a yield target of 18 percent on Treasury bills and bonds in the current fiscal year that ends in June. Much of the foreign capital that entered Egypt over the past couple of years came in the form of purchases of local debt, with investors drawn by the stable currency and yields that at one point exceeded 20 percent.

While lower yields could affect inflows by foreigners, “I think investors would like to keep decent exposure to the Egyptian market,” said Mohamed Abu Basha, head of macro analysis at EFG Hermes in Cairo. The currency’s stable outlook, “given the relatively strong external position and high foreign reserves, will still provide decent investments opportunities” even if returns from Egyptian debt are lower than some of its emerging-market peers, he said.

Egypt was battered by a selloff across emerging markets last year that saw some $10 billion of foreign money flow out of its domestic debt market. Figures released on Monday showed the country’s balance of payments crashed into a $1.8 billion deficit in the first half of 2018-19 fiscal year after registering a $5.6 billion surplus in the same period the previous year.

It is now banking that investors will stick around even if returns on its debt grow more modest as long the currency remains stable and the government moves to consolidate the economic overhaul implemented under a $12 billion International Monetary Fund program that expires in November.

Confident that trust had returned following the 2016 devaluation of the Egyptian pound and subsequent spending cuts, officials ended a mechanism late last year that allowed foreigners to repatriate their earnings in hard currency. It also announced a four-year debt-reduction strategy.

Also offering a measure of optimism was a decision by Egypt to approach JPMorgan Chase & Co. for inclusion in its emerging-market bond index.

In the budget document, the Finance Ministry noted potential risks to the economy that include turmoil in neighboring Mideastern countries, as well as the possibility of interest-rate increases by the U.S. Federal Reserve.

Below are other key highlights:

• The budget statement says that if the average interest rate increases by 1 percentage point, the debt -service bill will rise by as much as 10 billion pounds ($577 million) in the fiscal 2019-2020
• The new budget is based on an average wheat price of $214 a ton, up from $184.2 this year; it assumes oil at $68 per barrel, compared with $70 this year
• The budget based on an exchange rate of 17.46 Egyptian pounds per dollar
• Targets include a real GDP growth rate of 6 percent versus 5.6 percent this year, a reduction in public debt to 89 percent of GDP from 92.5 percent this year, and a drop in the budget deficit to 7.2 percent of GDP after 8.3 percent this year
• Total revenues seen at 1.1 trillion pounds, total expenditure at 1.6 trillion pounds
• Revenue is projected to grow 17 percent, expenditure seen up 12 percent
• Total investments are estimated at 1.2 trillion pounds, 13.4 percent of overall expenditure
• The ratio of investment to GDP is set to rise to 18.6 percent versus 17.3 percent this year
• Subsidies, grants and social benefits to be reduced to 20.8 percent of total expenditure from 22.5 percent this year
• The government plans to raise 80 billion pounds by offering stakes of 15 percent to 30 percent in 23 public companies over the next 24-30 months in sectors such as petrochemicals, oil, finance, real estate and industry. The market value of those companies is estimated at 430 billion pounds

--With assistance from Paul Wallace.

To contact the reporter on this story: Mirette Magdy in Cairo at mmagdy1@bloomberg.net

To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Tarek El-Tablawy, Amy Teibel

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