Woes may imperil Egypt bond rally

12/10/2012 08:21 AST

Talks on foreign aid are failing to quell concern that Egypt’s economy is struggling to recover, imperiling a bond rally that returned about twice as much as Middle East non-investment-grade debt this year.

Investors in the Arab nation’s 5.75% dollar-denominated bonds due in April 2020 lost 1.9% in September, paring this year’s return to 22% on Tuesday, data compiled by Bloomberg show. That’s the biggest monthly decline of the year and compares with a 2.5% gain in the HSBC/Nasdaq Dubai Middle East Sub Investment Grade US Dollar Sukuk/Bond Index. The index has returned 9.6% in 2012.

Policy makers are struggling to narrow the Middle East’s widest budget deficit as labour protests pressure them to raise wages and keep subsidies intact, analysts including London-based Exotix Holdings said. The government, which has secured aid and investment pledges from countries including Qatar, Turkey and China, is seeking a loan of as much as $4.8bn from the International Monetary Fund.

“There are grounds for optimism on IMF talks but I’m a hold on Egypt’s sovereign debt,” Gabriel Sterne, senior economist at Exotix, said by phone on October 8. “The markets may be putting slightly too much positive weight on the IMF program. Signing it is one thing. Implementing it will present a whole new set of challenges.”

Egyptian debt, which is rated five levels below investment grade at Standard & Poor’s, surged after president Mohamed Mursi won the nation’s first free presidential election in June. Mursi consolidated power from the military and attracted aid pledges including $2bn from Qatar, and $1bn from Turkey.

The yield on the benchmark notes has tumbled 237 basis points, or 2.37 percentage points, to 5.5% on Tuesday since the election, while the average yield on one-year local- currency treasury bills dropped 221 basis points to 13.76%. That compares with a 14 basis-point retreat to 5.7% for Lebanon’s similar-rated 6.375% bonds due the same year.

For more on this Click Here

Bloomberg