Egypt’s bonds are rallying in the face of rising violence and militant attacks as speculation builds that the army chief who ousted Mohamed Morsi will succeed the former president, restoring order and luring foreign aid.
The yield on Egypt’s $1 billion of Eurobonds due April 2020 dropped in the past four weeks to 6.02 percent on Jan. 24, near the lowest level in a year, according to data compiled by Bloomberg. That compares with 5.9 percent on the same day for higher-rated Turkish dollar bonds maturing three years later.
The top army council yesterday gave a green light for Defense Minister Abdelfatah al-Seesi, who hasn’t declared his intentions, to run for president. Thousands poured into Cairo’s Tahrir Square on Jan. 25 to support his candidacy, and voters backed a new constitution in a referendum this month. Investors are betting that as president, al-Seesi will seek to revive a struggling economy, even as militants escalate bombings and supporters of Mursi stage protests.
“Protests and clashes, as long as they don’t cause a full fledged revolution, are tolerated by investors,” said Sergey Dergachev, who helps oversee about $9 billion, including Egypt’s Eurobonds, at at Union Investment Privatfonds in Frankfurt. “They key triggering event is the restoration of some sort of political framework.”
Credit Risk
Egypt’s financial markets have rallied since Al-Seesi’s intervention in July to remove Mursi.
The nation’s credit risk, as measured by five-year credit default swaps, plunged more than 400 basis points since Mursi’s ouster to 483 at 10:36 a.m. in Cairo. The yield on the 2020 bond tumbled from a high of 10.77 percent, while the benchmark stock index has jumped more than 45 percent.
“The hope is that the army-backed transition has better prospects of completion,” Raza Agha, chief Middle East and Africa economist at VTB Capital Plc in London, said by e-mail yesterday. “The prospects of a strong, secular presidency that is backed by key institutions, political parties and regional donors, is also helping sentiment.”
Morsi’s removal triggered about $15 billion in aid pledges from Saudi Arabia, the United Arab Emirates and Kuwait, countries that opposed the former president’s brand of political Islam. The government is in talks to receive more aid from Gulf Cooperation Council countries, Finance Minister Ahmed Galal said Jan. 23.
Limited Upside
“The likely nomination of al-Seesi and potential further GCC aid, given ongoing negotiations, is market-friendly,” said Jean-Michel Saliba, an economist at Bank of America Merrill Lynch in London. The prospects, though, are already reflected in the current price of the Eurobonds, which “limits further upside,” he said before the military endorsed Al-Seesi to run for president.
The yield on the 5.75 percent securities climbed 18 basis points, or 0.18 of a percentage point, in the last two days to 6.11 percent yesterday, data compiled by Bloomberg show. It was at 6.13 percent today and the benchmark stock index gained 1.4 percent.
Successive regimes have failed to restore security to Egypt since President Hosni Mubarak was pushed from power in a mass uprising in 2011. The goal eluded the army council that took over from Mubarak, as well as Mursi. Since his overthrow, the military-backed government has faced regular protests and an upsurge in militant attacks.
Struggling Economy
The bond rally also masks an economy stuck in the worst slowdown in two decades. Gross domestic product may grow 2.8 percent in the fiscal year ending in June, according to the median estimate of 16 economists on Bloomberg. That compares with 5 percent in the year before the 2011 uprising that oustedMubarak.
Finance Minister Galal sees a brighter picture. The government expects the economy to expand as much as 3.5 percent, he said in an interview at the World Economic Forum in Davos, Switzerland. Unemployment may drop about 1 percentage point, he said.
“As the election process completes and a new permanent government is in place, investors are hopeful that three years of economic stagnation will come to an end, and the macroeconomic outlook and prospects will improve,” said Agha of VTB Capital.
Source: Bloomberg
