As Rates Fall, Egypt Eyes Shift Toward Longer-Term Debt
(Bloomberg) -- Egypt is considering shifting away from costly short-term domestic debt toward longer-term borrowing, as falling interest rates provide cheaper options to finance the fiscal deficit, its finance minister said.
The government will increasingly rely on five- to seven-year bonds instead of Treasury bills that have shorter maturities and currently make up the bulk of local-currency borrowing, Amr El-Garhy said in an interview in Washington, where was attending spring meetings of the International Monetary Fund and World Bank.
The evolution of the government’s domestic borrowing program suggests El-Garhy is confident inflation will continue to fall, allowing the finance ministry to capitalize on any subsequent reduction in interest rates. Treasury securities have been a key part of the government’s efforts to help bridge a fiscal deficit that it says will fall to 8.4 percent of gross domestic product by mid-2019.
“We’re contemplating this but we’re still waiting for better inflation figures and more action from the central bank,” El-Garhy said. Next year, the government hopes to see inflation in single digits “that can convince the central bank of taking the interest expense down further.”
Read more: Egypt set to favor bonds over T-bills as rates fall
Foreign investors have piled more than $23 billion into local-currency T-bills since Egypt removed currency restrictions and secured an IMF loan in late 2016. The flotation of the pound pushed inflation to above 30 percent and forced the central bank to raise interest rates, hurting businesses but attracting foreign interest in its short-term debt.
Egypt has cut its benchmark rate by 200 basis points this year, as inflation has eased to just over 13 percent. With interest rates falling, Treasury bond issuance is seen as nearly quadrupling in the next fiscal year beginning July 1 to more than 100 billion Egyptian pounds ($5.7 billion) from the previous 12 months.
Last week, the government sold 12-month T-bills at an average yield of 16.84 percent and 5-year T-bonds at 15.091 percent.
“Once the figures become more encouraging in terms of inflation, and then the move from the central bank to reduce interest, at this point in time we’ll shift more into medium-term bond issuance,” the minister said.
The government will look also to generate as much as $7 billion in dollar and euro-denominated bond sales on international markets starting in the first quarter of 2019, the minister said. Egypt has sold more than $13 billion in foreign-currency denominated bonds since the float.
El-Garhy said the government was pushing ahead with initial public offerings of state-owned companies that would increase the market capitalization of Egyptian stocks to around 4 trillion pounds, from the current level of around one trillion pounds.
Banque Du Caire’s offering will probably take place next year as part of the first stage of the program after which Egypt is mulling listing of other companies in logistics, power, hydrocarbons and mining, he said.
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