Egypt Confronts Addiction to Short Debt by Rethinking Bond Plans

(Bloomberg) -- Egypt wants to tear down a strategy that’s left one of the Middle East’s most indebted countries hooked on short-term borrowing.

The government is looking to raise the share of longer-dated debt to about 70 percent of annual domestic issuance by 2022 from 5 percent in the last fiscal year, Deputy Finance Minister Ahmed Kouchouk said in an interview. In making a “gradual shift” away from short-term T-bills and toward instruments such as Treasury bonds, the goal is to push the average maturity to around five years by 2022, almost double the level in the fiscal year ended in June.

“We used to borrow to repay both maturing debt as well as to finance new debt,” Kouchouk said. “That exerted additional pressure on the market and pushed yields upward.”

The effort is the next step in a sweeping program started in 2016, which helped secure a $12 billion loan from the International Monetary Fund to revive an economy battered in the wake of a 2011 uprising. As foreign inflows into Egypt’s government securities ended months of declines in January, the government returned to the dollar debt market this week by selling $4 billion in three tranches.

Read more: Focus on Curbing Debt Service Costs Behind Egypt Rate Cut

The Finance Ministry is now revamping its approach to borrowing as it prepares to present a four-year debt strategy to President Abdel-Fattah El-Sisi in March. To underscore the risks, a study by the IMF published this month found that “the use of short-term debt has been associated with a higher incidence of financial crises in the past.”

Key highlights from Egypt’s plan:

  • The government aims to issue between $250 million and $500 million of debut green bonds this year; it additionally plans to sell between $3 billion and $7 billion worth of international debt this quarter
  • Egypt is considering new instruments such as variable-rate bonds linked to inflation and zero-coupon securities. Also in the pipeline are international bonds denominated in the local currency, according to Kouchouk
  • The average maturity of Egypt’s sovereign debt is on track to reach 3.5 years by next June, compared with 2.8 years in the last fiscal year

“We want to diversify our debt instruments and currencies and also our local and international investor base to enhance completion and secure the best yields,” Kouchouk said. “We already started increasing our net issuance of T-bonds this fiscal year.”

The Finance Ministry will also work with all relevant counterparts to improve the primary dealer system to encourage further liquidity and competition in the market, he said.

In tandem with rethinking its approach to borrowing, the government is developing a medium-term revenue strategy with the support of the IMF, a plan it aims to finalize by next June, according to Kouchouk. The outlook will add clarity to Egypt’s revenue targets and assumptions behind these goals, he said.

Other key takeaways:

  • The revenue strategy includes measures to counter evasion and boost tax collection, as well as widening the revenue base by including more economic activities and entities
  • The objective is to maintain a stable tax policy. Egypt will also work on ensuring the progressivity of its system by “efficiently” levying taxes on growing economic sectors

The plan “would allow us to come up with a consistent and efficient medium-term reform package on the revenue side that allows us to meet our fiscal and deficit targets,” Kouchouk said.

©2019 Bloomberg L.P.