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Sunday, 28 May 2017

Oversubscribed eurobond issuance shows confidence in Egypt -El Garhy, Credit Suisse questions free float

No more tax increase, El Garhy says: The economic reform program is driving the confidence that debt markets are showing in Egypt, Finance Minister Amr El Garhy tells Bloomberg TV. “We’re putting together a program to take the ailing condition we were into a more positive direction in the coming period,” El Garhy says. Given that the biggest concern investors had was the FX situation, “the decision to float [the EGP in November 2016] was very important,” he says. Second on the investors’ lists was how Egypt will attract investments to the country. El Garhy says the strong demand seen for the longer-maturity issuances of the 10 and 30-year bonds was “a vote of confidence in the economic reform program Egypt is adopting.” Egypt will consider tapping the bond market again not before 2Q2018, “between April and May,” he says.

The government is expecting to raise EGP 10-15 bn in proceeds from the IPOs of state-owned companies expected to take place starting in FY 2017-18, the finance minister added.

The government’s bid to shore up its revenue base will not see it hike taxes, El Garhy stressed, saying “nothing that will surprise people in terms of more additional tax rates in the coming period of time.” In regards to subsidies, El Garhy was less clear-cut, saying subsidy cuts taking place now are part of the reform plan announced in 2014 to curb the extent of subsidies that were “very harming to the economy and to the people.” The timing of the cuts has not yet been decided, he added, saying, it “is being studied … we need to ensure there is a social protection program to shield people from the impact of any economic reform program.”

Watch the full interview with El Garhy, runtime: 7:07.

Amundi Asset Management’s Sergei Strigo agreed with El Garhy, saying the eurobond sale is “coming at an attractive level and we are constructive on Egypt following recent IMF agreement … there is also a limited supply of high yield sovereign bonds in the market.” Aberdeen Asset Management’s Anthony Simond sang praises of the reform agenda, saying “we like the reform story a lot … They are implementing an impressive fiscal consolidation, which, coupled with the huge inflows of foreign capital since the devaluation, means that their balance of payments position is now much more sustainable.”

Why hasn’t the exchange responded to the interest rate hike? The EGP “can’t be fully freely floating at this stage, that’s really the key takeaway,” Credit Suisse Head of Middle East Research Fahd Iqbal told Bloomberg TV (watch, runtime: 4:23). “It doesn’t make sense for a 200 bps shift in rates to elicit a complete lack of response [in the exchange rate],” he adds. Iqbal believes the EGP ought to be strengthening over time, but there is some level of USD shortage, he says. Iqbal also notes that the market did not anticipate Egypt raising rates, because there was no “need” for it at this stage, “the fact they did reflects their commitment to the IMF program.” That sends a positive signal regarding the outlook of the reform process, he says, adding that the overall position of the Egyptian economy will improve, not just by the IMF package, but by complete commitment to the reform process.

Free float or not, there was an uptick in foreigners’ demand for Egyptian treasury bill at Thursday’s auction following the interest rate hike, Ahmed Feteha writes for Bloomberg. Overseas investors bought 63% of the EGP 15.8 bn worth of 6-month and 12-month T-bills sold Thursday, said Samy Khallaf, head of the Finance Ministry’s public debt division. “Khallaf said all foreigners took positions using the central bank’s repatriation fund, which guarantees expedited transfer of money abroad,” Feteha writes.

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