CAIRO: Egypt’s attempts to lower borrowing costs and spur economic growth are stumbling because the country’s banking sector is loath to allow rival players into the lucrative treasury bond market.
The government, which has been trying for years to expand debt markets that lag far behind its equity markets in size, said in September it had almost completed a new legal framework for bond trading.
Egypt has been attracting increased interest from emerging market investors because of its sturdy growth, heading towards 6 percent a year, despite a cloudy global outlook.
Investors have also been lured by high local bond and T-bill yields compared to US and other more developed markets. That growing appetite has created an even more pressing need to make its securities market more liquid, analysts say.
But the 15 commercial banks that have the sole right to buy treasury bills and bonds directly from the government are unlikely to easily give up a cozy arrangement that allows them to sit on easy and risk-free sovereign debt.
Because it is hard for investors to resell securities on Egypt’s thinly-trading secondary market, the government must pay a risk premium on its debt, leaving it less money for domestic spending that could spur the economy.
"It’s not difficult to fix it. There is a blueprint out there, and they just need to press the button," said Ahmed Alanani, director of fixed income sales at Exotix in Dubai.
"What disappoints me is that similar reform measures were taken by other countries such as Turkey and Malaysia, which have a similar macroeconomic picture, except they now have a far more developed fixed-income market than Egypt ever could," he said.
Large deficit
Egyptian treasury bills have become more attractive to foreigners, who have taken advantage of a flood of cheap dollars to buy Egyptian government paper through the 15 commercial banks. The yield on T-bills has been around 9 or 10 percent.
Foreign treasury bills holdings soared to LE 64.8 billion ($11.2 billion) in September from LE 10.2 billion in September 2009, according to central bank statistics.
The foreign purchases has helped the government finance its large deficit without crowding private borrowers out of the market. The deficit reached 8.1 percent of gross domestic product in the year to the end of June.
Despite a surge in demand, analysts said the government has had to pay a higher yield, or an illiquidity premium, on the securities they offer because of the difficulties investors face if they want to sell the instruments before maturity.
Analysts say an active secondary market for government paper could also encourage corporate bond issues. Only a handful of Egyptian firms — Mobinil, Ezz Steel, GB Auto and Orascom Construction Industries — have bonds outstanding, and these trade infrequently.
One official said Egypt’s conservative central bank is among the actors least interested in changes to the present system.
"They have a very provincial view of the banking system. A banking system for them is a retail bank. And a retail bank that is conservative," said the source who was involved in efforts to reform bond trading. He asked not to be identified.
Spurring trading
The central bank "could have forced the banks to trade in government paper, they could have put limits on how much government paper a bank is allowed to hold, all sorts of things you can do that they are not doing," the source added.
Among the measures suggested to spur bond trading are to force the 15 primary dealer banks to act as market makers by regularly setting prices at which they would be obliged to buy and sell the government securities they hold.
"There should be some sort of requirement that every bank after getting government bonds sell 20 percent of them," Pharos Holding Chairman Mohamed Taymour said in Cairo.
Finance Minister Youssef Boutros-Ghali said in November the government had no immediate plans to demand banks act as market makers, saying this would need new legislation.
Another measure would be to allow investment banks to act as primary dealers alongside the 15 licensed banks.
The ministries of finance and investment approved such a plan last year. None of them have so far been granted a license.
"I have been campaigning really hard for brokers to enter government bonds, I talked to everybody and everybody says ‘yes, yes, we are for it’. But it is not happening," Taymour said.
A second investment bank analyst said the central bank did not want independent players in the government securities market.
"It must give the final approval for investment banks to act as primary dealers, and so far it hasn’t given any," said the analyst, who asked not to be named.
Analysts said it would be easy for the central bank to quash attempts at reform by arguing that the present system has been running perfectly well and any changes might draw hot money in, which could just as easily flow out and unsettle the market.
"If think they just would have had to whisper tales of volatility and that would have had an effect," said one analyst based outside of Egypt. –Additional reporting by Tom Pfeiffer and Samia Nakhoul
