The government of President Abdel Fattah Al-Sisi promised to carry out a lot of economic reforms in the country, which require excessive effort and financing, as the president had mentioned many times during different speeches.
The government has been asking for foreign help since Al-Sisi came to office, from Saudi Arabia, Kuwait, the United Arab Emirates, and other countries like China, Russia, and Germany.
The government also asked for loans from different international bodies such as the World Bank, the International Monetary Fund (IMF), and the African Development Bank, because it needs to bring together the money that will help it implement the reforms at a time during which Egypt is witnessing a foreign currency shortage.
The government also issued US-dollar denominated treasury bonds, in order to earn $4bn, which would help the country complete the finances needed for its $24bn economic reform programme.
The issuance is divided into three types of bonds: five-year bonds with an interest rate of 6.125%, 10-year bonds with an interest rate of 7.5%, and 30-year bonds with an interest rate of 8.5%.
The bonds’ interest rates were high, and the money needed for the economic reform programme was raised from $2.5-3 to $4bn, due to the unexpected high demand, according to deputy minister of finance for monetary policies Ahmed Kojak.
Kojak said in a conference held on Sunday that 729 investment bodies offered to buy Egypt’s bonds, compared to only 230 investment bodies in the previous issuance in 2015.
Daily News Egypt asked experts to find out what they think of the bond issuance and how the government should allocate the incoming resources.
The unknown, unclear purpose
Aliaa Mamdouh, a former economist at CI Capital, said that the idea of selling bonds is not bad, adding that the loans Egypt is currently receiving from the IMF and other international and regional bodies are important, because they imply that the economy is on the right track towards sustainable development.
Unlike what Kojak said during the conference that the current fiscal year’s gap is totally covered and probably more than 50% of the 2017/2018 gap, Mamdouh said that the money Egypt is receiving is not enough to finance Egypt’s deficits.
The expert said that Egypt still need foreign currency resources to finance its financial gap, and different sources of financing, which is why the government issued the bonds.
However, Mamdouh believes that the interest rate is higher than what she expected, explaining that the higher the interest rates are, the more investors do not currently trust Egypt. Interest rates of bonds usually increase in order to attract investors when countries do not have other attractive opportunities to offer.
She also said that the interest is high because a lot of countries are selling bonds as well, such as Saudi Arabia, Argentina, and Israel.
Regarding the interest rates, Kojak had said that the rate is “fair” compared to the previous issuance in 2015. He had stated that if some countries with similar conditions offered bonds at lower interest rates, it is probably because they have better economy indicators.
It is worth noting that Argentina had also offered three types of bonds—just like Egypt—with similar interest rates. The five-year bonds of Argentina had an interest rate of 6.875%, which is higher than Egypt’s. Argentina’s 10-year bonds had the exact same interest rate as Egypt’s (7.5%), and the 30-year bonds stood at a rate of 8%, which is 0.5% lower than the Egyptian bonds.
“This means that investors around the world do not trust us,” Mamdouh noted, adding that after the flotation of the Egyptian pound, the government expected that it would be possible to attract investments. However, this is not an easy task, and the government must improve economic conditions to attract investments, she added.
Mamdouh stated that nobody knows how the government is going to spend the money and on what, adding that until now, the government did not secure any investments, which means that it is spending the money on financing its gap. She believes that the external debt’s interest rates are getting higher, explaining that offering 30-year bonds puts massive burden on the coming generations.
The government needs more foreign currency reserves, as the rate of borrowing will not get any slower, she noted.
It is important to mention that the IMF had published its expectations about Egypt’s external debt and gross international reserves in a statement on 25 January, expecting Egypt’s external debt to reach $102.4bn by 2020/2021, and international reserves will increase annually to record $37.58bn by fiscal year 2020/2021.
“I do not believe that the Central Bank of Egypt (CBE) will use the money to increase foreign currency reserves,” Mamdouh said. She explained that the government must announce how it is going to spend the money, adding that spending on anything but improving the economy and investment environment will not help Egypt in its current crisis.
The expert believes that the foreign currency gap that Egypt has to fill is around $35bn.
However, Kojak had said that the long-term bonds might be used as foreign currency reserves.
For the government, there are no other options
Abobakr Emam, head of the research department at Prime Holdings, said that there is no other option but to issue bonds. He believes that Egypt has no different options to choose from, adding that the country has to offer bonds in order to earn foreign currencies.
He also said that the money Egypt would get from the issuance is not enough, but it complements the loans Egypt has been receiving, which is needed for the government’s economic reform programme.
He added that the money should not be used to import important commodities such as petroleum products or wheat, and that it may be used to increase foreign currency reserves to make investors feel safer.
Emam believes that the money targeted was increased due to a problem between Saudi Arabia and Egypt. He added that nobody knows the truth, but Egypt was willing to receive financing from Saudi Arabia before an incident at the United Nations security council (UN).
Since Egypt’s vote on a Russian-backed draft resolution regarding Syria in the UN security council in October 2016, the relation between Saudi Arabia and Egypt had been tense. Egyptian officials, however, are denying any political disagreement between the two countries.
Days following the voting, Saudi Aramco halted its oil supplies to Egypt.
“The interest rates on the bonds are high, but the rates are based on Egypt’s credit defaults swap,” Emam said, adding that the country is offering bonds at a time when other countries are doing the same. Hence, with the problems Egypt’s economy is facing, it is important to raise the interest rate to attract the targeted money.
A credit default swap transfers the credit exposure of fixed income products between two or more parties. It may involve municipal bonds, emerging market bonds, mortgage-backed securities, or corporate bonds.
In Egypt, the credit default swap is more than 4%, which is very high, Emam noted.
The rate is high but there are no other options, and Egypt has already asked several international bodies to finance its economic reform programme, and bonds are a last resort for generating funds, he said.
