Egypt issued less than a fifth of the debt it planned to sell as investors’ demand for yield raised borrowing costs to the highest in a year after the central bank increased interest rates last week.
The government sold 787 million Egyptian pounds ($110 million) of securities at an auction yesterday, 19 percent of the original 4.25 billion pounds it sought, according to central bank data posted on Bloomberg today. The average yield on three-year notes jumped 128 basis points, or 1.28 percentage points, to 13.97 percent. The yield on seven-year debt climbed 125 basis points to 15.781 percent. Both are the highest since July 2013.
The finance ministry missed its fundraising target even as it received bids equivalent to about 1.5 times its original target. It usually rejects bids if it judges investors’ yield demands to be too high. Borrowing costs for the most populous Arab country are soaring after the central bank unexpectedly raised interest rates for the first time in 16 months.
“Investors are worried about further rate hikes, so they’re overcompensating in terms of yield demands,” Khalil El Bawab, head of fixed income at Cairo-based EFG-Hermes Holding SAE, said by phone. “This is a major shift in rates policy to target inflation rather than encourage growth.”
The central bank said the rate increase aims to preempt a rise in inflation after the government cut fuel subsidies and increased taxes on cigarettes and alcohol to narrow the budget deficit. Egypt relies on selling domestic debt to plug the budget gap, which is projected by the Finance Ministry to reach 10 percent of economic output in the fiscal year that started July 1.
The debt sale also included 18-month zero-coupon bonds, with the yield climbing 128 basis points, or 1.28 percentage points, to 12.86 percent, the highest since the Finance Ministry started issuing the notes in September.
Source: Bloomberg
