By: Mohamed Eyad, Nasir Youssef, Raghda Helal and Mohamed Al-Qasas
The value of returns on US Dollar-denominated bonds on the international market are set to reach $1bn by 2022, representing a 7.87% or 44-point increase, after Egypt’s most recent credit downgrade.
The Bloomberg News Agency, recently stated that returns on Egypt’s government bonds continued to rise, despite the Moody’s Rating Agency’s recent downgrade of Egypt’s credit rating for the second time this year, bringing it 7 points below investment grade.
Bloomberg pointed to Egypt’s continued political polarisation and the Government’s inability to prop up and support its foreign currency reserves as threats that could jeopardise the acceptance of the country’s pending $4.8bn International Monetary Fund (IMF) loan.
Amr Hassanein, president of the Middle East Rating and Investment Service (MERIS), said that Egypt would soon suffer from import losses as a result of the recent credit downgrade, which may force the price of goods on the country’s domestic market to increase.
He added that Egypt’s credit had been downgraded six times since 2011.
Thomas Bayern, analyst for the Moody’s Rating Agency, said that Egypt’s polarised political climate has prevented the government from effectively administering the country, bringing stability back to the streets, and avoiding the outbreak of another economic crisis.
The Government has been forced to reduce the value of its economic programme over the last four months, and adjust its target deficit rate to 9.5% of GDP by the end of November 2013, as opposed to the 8.5% of GDP seen by November 2012.
Sayed Hirsh, economic analyst for an independent think tank based in London, said that Moody’s decision to decrease Egypt’s sovereignty rating is a reflection of the country’s debt crisis. He added that he did not expect a large influx of foreign investment to pour into Egypt during the coming months, a fact which reflected on the country’s poor international credit rating.
A report released by Moody’s stated that Egypt’s credit downgrade was also the result of widespread fears held by the international community that the country would default on its international loans and obligations. It was pointed out however that this may not necessarily happen, as the recent downgrade to ‘Caa1” demonstrated that the average cumulative default rate for Egypt over a period of one year was 10%, nearing 40% for a period of five years.
Egypt’s Central Bank was also recently forced to raise its interest rates for the first time since 2011, after numerous decreases in the price of the country’s currency and rising rates of inflation.
The Central Bank recently increased its interest rates on corridor deposits half a point to 9.75%, with those on overnight lending increasing to 10.75%.
Ahmed Abu Al-Saad, general Director of the Delta Rasmala Securities Company, acknowledged that interest rates on Government bonds, which Egypt’s government currently relies on to close budget deficits, have increased in recent weeks.
Assam Khalifa, General director of the National Fund Management Company, stated that the size of monetary funds had recently doubled as a result of Egypt’s credit downgrades over the last year, which has led to the creation of a total of seven new funds by February 2013.
Samih Khalil, General Director of the CIBC Investment Funds, said that the cost of funding Egyptian debt internationally was soon set to rapidly increase to 700 points, especially when taking into account the new measures proposed by Egypt’s government.