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Sunday, 24 February 2019

Still the best carry trade in the world despite surprise rate cut, Egypt is recalibrating its debt strategy

Still the best carry trade in the world despite surprise rate cut, Egypt is recalibrating its debt strategy ahead of March presentation to El Sisi: Pundits who worried that Egypt’s attractiveness to the carry trade would slide after a rate cut can take heart: “Egypt’s real interest rates remain elevated relative to emerging-market peers even after the central bank used its opening meeting of 2019 to loosen policy for the first time in almost a year,” Bloomberg reports. The business information service quotes CI Capital senior economist Hany Farahat as noting that, “Lower policy rates are not a threat to foreign inflows or inflation. Market expectations of an easing cycle will encourage fixed-income investors to lock in high yields before further drops.”

Inflows, including some USD 900 mn last month, are helping keep the EGP at its strongest level against the greenback in nearly two years, Bloomberg says, with the EGP changing hands for 17.54 against the USD.

Cutting the cost of debt service is now key: The CBE sent a message at last week’s bond auction that it’s not going to pay a premium, and the Finance Ministry’s focus is now on “reducing the cost of servicing debt and boosting the real economy.”

That’s why Egypt is now targeting a “gradual shift” toward longer-term debt, with Vice Minister of Finance Ahmed Kouchouk telling Bloomberg at the end of last week that the state is looking to “raise the share of longer-dated debt to about 70% of annual domestic issuance by 2022 from 5% in the last fiscal year.”

It’s the next logical step in the reform program, the story suggests, with Kouchouk explaining that, “We used to borrow to repay both maturing debt as well as to finance new debt. That exerted additional pressure on the market and pushed yields upward.”

Look for this story to have legs as the Finance Ministry prepares to present its debt control strategy to President Abdel Fattah El Sisi in March.

Keeping it all in context: Egypt is now one of the 20 top sovereign borrowers, according to S&P Global Ratings. Globally, sovereign debt will hit USD 50 tn by the end of this year, a 6% rise from 2018. The ratings agency said governments will borrow USD 7.78 tn from long-term commercial sources this year, around 3% more than last year. Debt refinancing will account for the bulk (around USD 5.5 tn) of the new borrowing. The agency forecasts that Egypt’s total sovereign debt will increase to USD 228 bn in 2019. Egypt’s recent focus on short-term issues means we have the second-highest debt rollover ratio in the world and will borrow the equivalent of 35.6% of GDP this year to refinance maturing debt, S&P suggests.

Other takeaways from the packed interview with Kouchouk:

  • Egypt will sell USD 3-7 bn worth of international debt in 1Q19;
  • Look for USD 250-500 mn in a maiden issuance of green bonds;
  • New instruments could also include “variable-rate bonds linked to inflation and zero-coupon securities … [and] international bonds” denominated in EGP;
  • FinMin’s revenue strategy will see it both clamping down on tax evasion and widening the tax base;
  • “Tax stability” is still the order of the day.

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