Monday, January 4, 2010

Egypt Seeks Deeper Bond Markets to Curb Costs, Help Companies

By Alaa Shahine

Dec. 29 (Bloomberg) -- Egypt’s Finance Ministry plans to deepen the country’s bond markets by selling fewer benchmark maturities in larger amounts, helping reduce borrowing costs and providing better guidelines for corporate borrowers.

The ministry will focus on selling bonds with maturities of three, five, seven and ten years, dropping other maturities that it used to sell, Mohamed Assad, public debt adviser to Finance Minister Youssef Boutros-Ghali, who approved the plan, said yesterday. The benchmark bonds may be “reopened” for additional sales, Assad said in an interview.

“An investor would demand a high premium when subscribing to a small illiquid issue because of the illiquidity risk,” Assad said. Larger sales will “reduce to a minimum the illiquidity premium” and help to “provide reference prices for other non-government issuers.”

Egypt relies mostly on treasury bills and bonds to finance its budget deficit, which is projected to widen to 8.4 percent of gross domestic product for the fiscal year through June 2010, from 6.9 percent in the previous two years.

The measures are part of the ministry’s efforts to “better manage its debt, to ultimately lengthen its debt maturity and reduce its costs,” Reham El-Desoki, senior economist at Cairo- based investment bank Beltone Financial, said by e-mail. The average maturity period of Egyptian debt has risen to 2.25 years from 156 days in 2003, she said.

Egypt had 130 billion pounds ($23.6 billion) of outstanding bonds at the end of November, 10 times as much as in June 2004, the Finance Ministry said in a presentation to bankers yesterday. The ministry plans to issue 110 billion pounds of bonds and treasury bills in the first quarter of 2010.

Helping Companies

The Egyptian plan also aims to help companies sell bonds on local markets, instead of relying on bank loans.

“The intention is to create a sort of benchmark so that it’s easier for companies to borrow using the bond market rather than from banks,” said Simon Kitchen, senior economist at investment bank EFG-Hermes Holding SAE. Currently, “there’s very little trading” in bonds, he said.

Egypt’s central bank sets limits to how much banks can lend to individual companies, pushing businesses toward syndicated loans or bond sales as ways to raise money. Companies including the Egyptian Co. for Mobile Services, the biggest mobile phone operator, and carmaker Ghabbour Auto have announced plans to sell bonds.

“That’s a global trend,” Kitchen said. “Because banks globally are perhaps reluctant to lend, then some companies are going directly to the bond market.”

Credit Tightens

Bank lending to non-government companies in Egypt fell 1.3 percent in the 12 months through October, data on the central bank’s Web site show.

“We do not expect a strong recovery in credit growth, as base effects and banks’ risks averseness compel banks to remain prudent and favor investing in risk-free government securities,” El-Desoki said in an e-mail on Nov. 25.