Egypt’s finance minister said investors were buying in to the crisis-hit country’s economic reform programme after its latest bond issue was nearly four times oversubscribed.
Demand for Egyptian debt has increased since Cairo agreed to a series of politically sensitive reforms, including cutting fuel subsidies, devaluing the pound and increasing value added tax, to secure a $12bn loan from the International Monetary Fund last year.
Egypt took orders of $11bn for $3bn of bonds it sold last week, adding to the $13bn in orders it received for the $4bn sold in January, Amr el-Garhy, the finance minister, told the Financial Times.
“This is a vote of confidence in the economic story of Egypt and the economic reform programme that Egypt is adopting,” Mr el-Garhy said in an interview. He noted that the coupon, or interest rate, offered on the bonds, which ranged from 5.45 per cent to 7.95 per cent depending on the duration, was significantly lower than for the January issue.
Cairo agreed to the IMF programme in August as it grappled with weak economic growth, a gaping fiscal deficit and a severe foreign currency shortage. Under the conditions of the loan package, the government allowed the pound to float, after which the currency’s value halved.
The economy has been struggling since the 2011 revolution that forced Hosni Mubarak from office, with growth averaging about 2.5 per cent over the past five years, while foreign investors largely shunned the country as it was plagued by instability.
However, while investors have welcomed the reforms, the measures helped drive inflation to 31.5 per cent in April, hurting many ordinary Egyptians as food prices have soared.
In spite of the hardship, Mr el-Garhy said there was no chance that Cairo would scrap the IMF-backed reform programme. “What we are sure of is that this is a programme by the Egyptian government that we are going to deliver,” he said.
In an indication of such resolve, the Egyptian central bank raised interest rates by 2 per cent last week to combat inflationary pressures, meaning that banks must pay 17.75 per cent to borrow money overnight.
Although the rate hike drives up the cost of capital for companies, it nevertheless supports the value of the Egyptian pound, thereby helping to damp imported inflation.
“It shows a commitment to getting inflation back down again, after months where it has been consistently high,” said Charlie Robertson, chief economist at Renaissance Capital, an investment bank.
Mr el-Garhy said some positive signs were starting to show.
“On a month-on-month basis [inflation] is starting to abate. In April it showed a month-on-month increase of 1.7 per cent, down from the levels of four months ago when it was rising at over 4 per cent month on month,” he said.
He added that he expects marked reductions in inflation in October and November this year as base effects kick in.
There was cause for some optimism in the manufacturing sector, which is stepping up activity partly as a devalued currency makes exports more competitive, Mr el-Garhy said. The non-oil private sector PMI, a widely-followed measure of manufacturing activity, rose to 47.4 in April, up from 45.9 per cent in March and below 40 in November last year, according to Trading Economics, a data provider.
Egypt is struggling to attract foreign investment to help boost industry and tackle widespread unemployment.
Still, Mr el-Garhy said the strong demand shown in the bond sale last week, combined with the lower coupon rates on the bonds, indicated that “the market is basically perceiving” that Egypt deserves a credit ratings upgrade. If this transpires, it could reduce significantly the interest that Cairo must pay on its ballooning overseas debt.
Moody’s, which accords Egypt a “junk” rating of B3, estimates that the country will need to attract between $16bn and $21bn annual funding from overseas sources over the coming three years. S&P and Fitch, two other rating agencies, also rate Egypt’s sovereign debt as subinvestment grade.