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Egypt pays less than Spain for euros as IMF talks advance


The Egyptian government debt carries a junk grade from Moody’s Investors Pic: Bloomberg

Cairo: Egypt locked in lower borrowing costs than higher-rated Spain in selling a more-than-planned €640.2 million ($817 million) of debt, as prospects for an International Monetary Fund loan accord improved.

The government, whose debt carries a junk grade of B2 from Moody's Investors Service, raised 60 per cent more than it sought on Monday through the offer of one-year notes, paying an average yield of 2.548 per cent, central bank data shows. The yield compares to 2.82 per cent on similar-maturity notes from Spain, rated the lowest investment grade of Baa3 by Moody's, and 12.985 percent on Egyptian pound notes.

Momtaz El Saieed, finance minister, said in an interview in Cairo that 'some small modifications' are being made to the agreement with IMF officials and a letter of intent may be signed. The government has requested a $4.8 billion loan from the Washington-based lender. Egypt's economy may expand 3.2 per cent next year after slowing to 1.8 per cent in 2011, the slowest pace in about two decades, according to the median of 10 economists' estimates.

"Expectations that an IMF deal will be reached are driving demand especially for local banks which are trying to cover rising foreign-currency deposits," Nour Mohei-El-Din, assistant general manager for treasury at BNP Paribas Egypt, said.

Increased appetite
Egypt first sold euro-denominated notes in August, as the pound weakened 0.4 per cent against the dollar and 2.6 per cent versus the euro. One-month volatility on the pound has risen 70 per cent this quarter, the biggest advance among 10 Middle Eastern currencies after Israel's shekel, data shows.

At the first sale, international investors bought 20 per cent of securities and there was 'increased appetite' from both locals and foreigners for Monday's issue, the central bank said in a statement. The government has said the IMF agreement would unlock international aid and help lower the highest budget deficit in at least five years.

The shortfall reached 11 per cent of gross domestic product in the fiscal year that ended in June, government data show. Egypt's foreign-currency reserves plunged more than 50 per cent after the chaos that accompanied the January 2011 uprising.

The confusion and political vacuum that followed the overthrow of president Hosni Mubarak prompted foreign investors to dump government securities, pushing yields on dollar- denominated government debt due in 2020 to as high as 8.79 per cent in January.

IMF 'key'
The bonds yielded 5.35 per cent yesterday. "From a macroeconomic perspective, considering the reserve loss they had, the IMF program is the key," Raza Agha, chief Middle East and Africa economist at VTB Capital, a unit of Russia's second-largest bank, said by phone on Monday from London.

"A successful auction or two should not make the Egyptian authorities or investors complacent. Yes you are being helped by global liquidity positions, and by promises of donor support, but you need a policy programme that is provided credibility with an IMF programme."

Facing higher domestic borrowing costs, the government started selling foreign-currency domestic debt a year ago, raising $5.82 billion from dollar-denominated notes and €1.15 billion. Egypt plans to raise $1.5 billion of one-year dollar T-bills on November 26, the central bank said in a statement. A similar amount of debt matures this month.

"Over a one-year horizon few people would be worried about Egypt defaulting on a foreign-currency bond," Gabriel Sterne, a fixed income economist at Exotix Holdings Ltd. in London, said by phone on Monday.

Mursi election
The average yield on Middle East sovereign debt has tumbled 98 basis points, or 0.98 percentage point, this year to 4.015 per cent on Monday. Yields on Egypt's 2020 dollar bonds have plunged 252 basis points since the June election of President Mohamed Mursi, data shows. Mursi, who won Egypt's first free election, restarted IMF talks and raised the loan request by 50 per cent.

Gross official reserves rose $440 million to $15.5 billion in October from a month earlier after the country received $1 billion in loans from Qatar and Turkey. Qatar is set to provide another $500 million on Nov. 30, part of a $2 billion aid package, Egypt's Finance Minister El Saieed said in a phone interview November 11.

"We see long-term growth opportunity in Egypt and the euro presents a more attractive investment compared with the Egyptian pound due to its volatility," Hakim Aziez, the London-based head of investment at GCA Asset Management, which bid for the notes , said.

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