Why is Egypt canceling T-bond auctions?

For the second time this year, the Egyptian government canceled the sale of treasury bonds after banks demanded higher interest rates.

al-monitor The headquarters of the Ministry of Finance is seen in Cairo, Aug. 4, 2016.  Photo by REUTERS/Amr Abdallah Dalsh.

Sep 25, 2018

Egypt's Ministry of Finance earlier this month canceled the auction of three- and seven-year treasury bonds — valued at 3.5 billion Egyptian pounds (around $196.6 million) — over banks' request for higher returns. The Sept. 3 order is the second consecutive cancellation of T-bond sales in 2018 aimed at preventing the state treasury from incurring the heavy financial burden of debt service on the bonds. The tender was canceled even though it was covered 1.6 times, at 5.7 billion Egyptian pounds (about $317.8 million).

“The requested interest rates were not within the logical limits and reflected neither the good economic and financial performance nor the improvement in Egypt's credit rating,” the Finance Ministry commented in a press statement obtained by Al-Monitor. The high interest rates requested by banks were more the result of the risks related to the emerging markets, the ministry added.

In July 2017, the Finance Ministry had canceled bids to sell three- and eight-year T-bonds totaling 3.5 billion Egyptian pounds (around $196.6 million) as banks and investors requested higher interest rates. “The prices were not appropriate,” Assistant Finance Minister Khaled Abdel Rahman told Reuters at the time. "We will accept the prices that suit us.” 

According to Finance Minister Mohamed Maait, for the current 2018/19 budget, Egypt is planning to lower the interest rates on government debt instruments to 14.7%, compared to 18.5% under the 2017/18 budget. Banks have reportedly been seeking rates varying between 18% and 18.5%, which prompted the Finance Ministry to twice cancel auctions this year.

Hany Abou el-Fotouh, a banking expert and vice chair of Egypt Metropolitan Consulting, told Al-Monitor that foreign investment in treasury bills issued by the Egyptian government from March to July witnessed a drop of around $6.5 billion, in the end totaling approximately $15.01 billion. There are, definitely, certain internal and external reasons lurking behind such a decline, he added.

“The Central Bank of Egypt's decision to cut interest rates with the aim of curbing returns on domestic debt instruments has reduced investors’ interest in investing in T-bonds,” Fotouh remarked. “Investments in domestic debt instruments also plummeted due to fear of the investment fund owners’ lack of foreign currency, especially when they transfer money from the pound to the dollar.”

According to Fotouh, the current economic crisis facing the world’s major emerging markets is the main external reason affecting the banks and investors’ move to request higher interest rates.

“The major emerging markets, including Turkey, Argentina and Indonesia, are now under pressure as their currencies have experienced a huge drop in past months, after the US Federal Reserve's decision to raise the target for its benchmark interest rate by 0.25% in June,” Fotouh said. “The drop varies between 5% and 10%, except for with Turkey and Argentina, whose currencies’ value plummeted at higher rates.” The decline contributed to the exit of foreigners from investing in government debt instruments, he added.

Whether the next T-bond auction will be canceled depends on developments in emerging markets, as they might impact other markets, including Egypt's, Fotouh said.

Foreign investment in Egyptian government debt instruments totaled $23.1 billion at the end of March 2018 compared to $20 billion in December, according to Finance Ministry figures.

Meanwhile, for the current budget, Egypt’s needs 714.637 billion Egyptian pounds (around $40 billion) for funding, with 511.208 billion ($28.7 billion) of that theoretically derived from domestic debt instruments and the remainder from foreign financing through bonds and a loan from the International Monetary Fund (IMF).

In August, Moody’s upgraded its outlook on Egypt’s credit rating from stable to positive, giving it a rating of B3. This occurred after the so-called economic reform measures adopted by the Egyptian government after the approval of an IMF $12 billion loan. These measures included floating the Egyptian pound, curbing energy subsidies and imposing taxes, including a value-added tax.

“Banks and investors have the right to request high interest rates to financially protect themselves,” Bassant Fahmy, a member of the parliament's Economic Affairs Committee, told Al-Monitor. “Even if the Finance Ministry again cancels auctions, they won't accept lower interest rates.”

Lowering interest rates or imposing more taxes is not the best way to curb a budget deficit. Fahmy observed, “The government should decrease its expenditures by amending the high salaries of senior officials and resorting to private funds. This will help develop the resources of the state budget without piling pressure on citizens or implementing procedures that might discourage investors.”

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