Egypt’s internal debt rises on wider budget deficit

After the announcement of a plan to slash Egypt’s debt, authorities on Jan. 1 unveiled plans to issue treasury bills and bonds worth 181.5 billion Egyptian pounds ($10.1 billion) in January, up from 152.7 billion pounds ($8.5 billion) for the same month a year earlier.

Moreover, the government will increase debt issuances by 14% in the first quarter of 2019, year on year, to 473.7 billion pounds ($26.3 billion), up from 415 billion pounds ($23.1 billion) in the first quarter of 2018.

The Finance Ministry said on its website that it would issue 91-day, 182-day, 273-day and 364-day treasury bills worth 42.5 billion pounds ($2.37 billion), 43.75 billion pounds ($2.44 billion), 42.5 billion pounds ($2.37 billion) and 46 billion pounds ($2.56 billion), respectively. The sovereign debt issuance will also include treasury bonds worth 6.75 billion pounds in maturities between 3 and 10 years.

The new public debt issuances were revealed after the government unveiled plans to slash the public debt-to-GDP ratio to 80-85% by June 2022. High interest rates have presented financial and monetary authorities with a “tricky situation” in trying to balance the sovereign debt-to-GDP ratio, Sahar el-Damati, an economic and banking expert, told Al-Monitor.

“The treasury bills and bonds are instruments to bridge the gap in the nation’s finances,” Damati noted. “Therefore, I’m not at all surprised about sovereign debt issuances to close the gap in the state budget.” 

Egypt’s internal debt rose to 3.695 trillion pounds ($207.6 billion) at the end of June 2018, up from 2.6 trillion pounds ($146 billion) a year earlier, data from the Central Bank of Egypt shows. The debt consists of treasury bills and bonds issued by the Central Bank on behalf of the Finance Ministry.

Public debt to GDP fell from 108% at the end of June 2017 to 98% at the end of June 2018, Finance Minister Mohamed Maait said on Nov. 1. The country’s foreign debt had totaled $92.64 billion pounds at the end of June 2018, accounting for 37.2% of GDP, Prime Minister Mustafa Madbouly said on Sept. 9.

“If the state wants to decrease sovereign debt, the yields on debt instruments must decline,” Damati explained. “Higher interest rates increase the burden on the government, negatively impacting growth, credit and the business climate in general. Rates will be cut when inflation falls, and this will eventually ease the pressure on the state budget as yields on the sovereign debt will decline.”

Damati further observed, “Yields on treasury bills have reached 19.8%. However, the net yields stand at around 16% after deducting tax. With the current rate decreases in Turkey and Argentina, Egypt still has a competitive advantage since Egypt’s CDS [credit default swap] is better.” As she explained, the CDS is a country measure for macroeconomic risk.

The Central Bank kept interest rates on hold at the end of December. Deposit and lending rates currently stand at 16.75% and 17.75%, respectively, CBE data show.

In regard to these figures, Damati said, “On the positive side, high rates have boosted inflows of foreign portfolios, which have exceeded $20 billion since the currency float in November 2016 until the emerging markets faced economic problems, raising rates to 26% in Turkey and 40% in Argentina.” 

The budget for fiscal year 2018/19 projects that the deficit will narrow to 8.4% of GDP, compared to 9.8% in 2017/18, with a primary balance of 2% of GDP (compared to 0.2% in the previous fiscal year), according to a Deutsche Bank report, “Emerging Markets Special Publication: Egypt. Another Window of Opportunity?,” issued last November, a copy of which Al-Monitor has obtained. 

The Deutsche Bank report stated, “We believe the government will not be able to meet its FY 2018/19 fiscal deficit target, mostly due to elevated oil prices and higher-than-expected funding costs. … Subsidy spending may also be a source of risk to achieving the deficit target given global oil prices. We have become more pessimistic due to recent developments, expecting the fiscal deficit to reach 9%.”

In a bid to ease the country's budgetary woes, the Egyptian government is tipped to slash outlays and increase public revenues through a raft of measures.

Damati explained, “The government should do its best to broaden the tax base to increase revenues and to improve the efficiency of collection, [in addition to] boosting financial inclusion, incorporating the informal sector into the formal sector, increasing exports and the sale of land and real estate, launching IPOs [initial public offerings for state-owned firms] on the stock market to revive the equity market and offering local and foreign investors an opportunity to invest in fundamentally promising stocks, and last but not least enhancing growth in GDP through private and foreign investment.”

Hany Tawfik, founder of the Egyptian Private Equity Association, was quoted on Jan. 5 by the Vetogate news portal saying that the government needs to rein in spending. “The government should reconsider its spending,” he said. “Egypt has so many diplomatic missions worldwide in addition to 6 million public servants.” He also remarked, “It is a must to merge the shadow sector into the nation’s formal economy.”