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Wednesday, 16 March 2022

FinMin sees budget deficit widening amid commodities price shock

The Madbouly government sees the FY 2021-2022 budget deficit target widening to 6.9% from 6.7%, Vice Minister of Finance Ahmed Kouchouk told Al Arabiya. This comes as war-related global price surges putting a strain on the state budget. The ministry expects to have to find an extra EGP 15 bn to cover the higher costs of importing wheat.

Softer targets were flagged by Finance Minister Mohamed Maait last week, casting doubt on the government’s ability to keep to the 6.7% target in light of higher commodity prices and the loss of Russian and Ukrainian tourists. The ministry is also revisiting its spending and fiscal targets for FY 2022-2023, he said. The updated draft budget is due to be presented to the House of Representatives on 31 March.

It’s looking more and more as if the Central Bank of Egypt may be prompted to raise interest rates: EFG Hermes’s Mohamed Abu Basha has become the latest analyst to forecast a rate hike when the central bank meets later this month, telling Al Arabiya that policymakers could raise rates by 100 bps to help tamp down rising inflation. A rate hike would also support portfolio flows as inflation eats into the country’s real rate, which is among the highest in the world.

Higher interest rates = higher debt burden: The government is considering offering more short-term treasury bills to reduce the cost of a rate hike, Kouchouk told the broadcaster. Treasuries are typically perceived by investors as being lower risk than long-term bonds and carry lower interest rates as a result.

What does that mean for the debt diversification strategy? The ministry has been working to lengthen the average maturity of its debts by issuing fewer treasury bills and more long-term bonds. It’s aiming to extend the average tenor of its debt to five years, up from 3.4 years currently.

Our samurai bonds are on the chopping block (for now): Egypt’s first samurai bond issuance will likely be delayed due to the deterioration of market conditions, Kouchouk said. The Finance Ministry had aimed to sell around USD 500 mn of JPY-denominated bonds in Japan by the end of June as part of its debt diversification strategy.

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