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Tuesday, 29 January 2019

Egyptian public debt unsustainable, says S&P

What’s the outlook for debt issuances in emerging markets as the Finance Ministry gets set to go on the road? The Finance Ministry’s announcement on advisors yesterday came as the global business press debates debt levels and prospects for new issuances across EM. Egypt, one of the more active EM issuers in the past two years, came up frequently.

S&P has tagged Egypt along with Argentina, Pakistan and Lebanon as having “unsustainable” levels of public debt, Reuters reported. But our rising foreign and domestic debt have not prompted the ratings agency to issue a downgrade warning. Meanwhile, Bloomberg reports that Fitch has a positive outlook on Egypt’s rating as of the end of 2018 even as it warns that other EM issuers could face credit downgrades this year.

With other EM credit ratings on shaky ground, Egypt could shine: All three of the major ratings agencies have warned of further downgrades among emerging economies. Moody’s currently has 19 countries EM countries on downgrade warnings (compared to 11 for upgrade) while Fitch has predicted that 2019 will see more downgrades than upgrades. “I wouldn’t be surprised if we saw more downward pressure [on global ratings] because we think the risks are really skewed to the downside,” Fitch sovereign analyst James McCormack told Reuters.

Could economic uncertainty mean Egypt has less competition for global capital? Net issuances of EM sovereign debt are set to fall over the next 12 months as governments react to uncertain economic conditions, market analysts told the FT. David Spegel, founder of investment consultancy Fundamental Intelligence, forecasts net sovereign bond sales falling to USD 91.6 bn from USD 122.2 bn due to record maturity levels and government reluctance to refinance.

What does this mean for sovereign bond prices? Falling net supply of EM sovereign debt will help to support bond prices in the face of rising US interest rates, analysts said. “I think this is going to be an OK year [for EM bonds],” Spegel said, adding that the jury is still out as to whether money will move to less risky markets as volatility increases. Shamaila Khan, director of EM debt at AllianceBernstein, added that the declining supply is “another supportive factor for asset price performance.”

Gross EM corporate debt to hit record levels: Spegel predicts record levels of corporate bond issuance in emerging economies this year (rising 18% to USD 549bn). Taking maturities into account though, net corporate debt will actually increase at a slower rate compared to 2018.

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