Egypt’s debt markets are on edge like never before, increasingly consumed by the threat of it missing a payment on its bonds within a year.
(Bloomberg) — Egypt’s debt markets are on edge like never before, increasingly consumed by the threat of it missing a payment on its bonds within a year.
Crunch time appears closer because some investors are losing confidence in a government that’s struggled to regain access to external financing after a succession of crises. The cost of insuring against a sovereign default in the next 12 months has surged to a record, resulting in an anomaly that’s brought the premium over five-year contracts to the widest ever.
About $33.7 billion of Egypt’s Eurobonds, or about 86% of its outstanding external securities, are trading at more than 1,000 basis points above US Treasuries — the threshold for debt to be considered distressed.
“The inversion in the credit curve is certainly indicative of the market pricing in a higher chance of near-term default risk,” said Gordon Bowers, a London-based analyst at Columbia Threadneedle Investments.
The International Monetary Fund has delayed its review of a $3 billion rescue program and billions of dollars in promised funding from Gulf Arab nations have yet to materialize as they seek greater evidence that authorities are moving ahead with implementing reforms announced last December.
The lack of clarity is making it even harder for the government to move ahead and get the money it needs to cover its spending needs. Adding to the pressure, S&P Global Ratings lowered the outlook on Egypt’s B credit score to negative at the end of last week, taking a far more downbeat view of the nation’s finances than the IMF.
Getting Impatient
“The market is getting quite impatient on the lack of progress and signs the authorities are playing hardball when they have the weaker hand in negotiations,” Bowers said.
Egypt’s one-year credit-default swaps climbed 1,000 basis points this month to 2,283 at the New York close on Wednesday. In comparison, the five-year contract rose about 390 basis points to 1,703 during the same period.
The nation’s bond due May 2024 traded near an all-time low of 82 cents on the dollar on Thursday. Its longer-maturity debt has slumped deeper into distressed territory, with the security due 2061 languishing at around 49 cents.
Prices of the nation’s battered bonds correspond to a 75% chance of default over the next 10 years and 15% over the next six months, according to calculations by London-based Tellimer, a provider of research and data on emerging markets to investors.
“While in principle many still see Egypt as ‘too big to fail,’ that doesn’t mean anything if its official partners are not willing to extend the financing needed to avoid a balance of payments and debt crisis, and this argument no longer seems to carry the weight it did with investors just a few months ago,” Patrick Curran, a senior economist at Tellimer, wrote in a report emailed on Thursday.
Heavily exposed to the shock waves of Russia’s invasion of Ukraine, the North African nation of more than 100 million people is struggling with its worst foreign-currency crunch in years.
The IMF wants to see privatization deals for state assets and genuine flexibility in Egypt’s currency before carrying out its first review, which it had earlier suggested might be completed in March.
‘Financing Challenges’
“The market is increasingly concerned about financing challenges,” even though Egypt is unlikely to default in the near term, said Kaan Nazli, a money manager at Neuberger Berman in The Hague, Netherlands.
“For the sentiment to shift more decisively we would need to see more external support, in the form of an augmentation of the IMF program, acceleration of asset sales or Gulf support — or ideally both,” Nazli said.
In a stark assessment of the dangers facing Egypt, Moody’s Investors Service also warned on Wednesday that risks for the government’s “debt affordability and debt sustainability profile” are on the rise after a slower-than-anticipated progress in asset sales and the resumed drawdown of foreign-exchange liquidity.
And as a weaker pound inflates the value of foreign currency-denominated liabilities, Egypt will struggle to achieve “a meaningful reduction” in the ratio of general government debt to economic output, which Moody’s projects at 91.3% for fiscal 2023.
Debt Burden
The rating company estimates Egypt’s total external debt stock at $155 billion as of September 2022, of which $27.5 billion is short-term liabilities. Moody’s has the lowest sovereign rating on Egypt among the three major credit assessors after a downgrade in February to B3.
“Egypt’s large external debt maturity profile is becoming increasingly challenging,” Moody’s said. “While the government has made significant progress with finalizing the external funding sources for fiscal 2024, the funding plan also relies on continued capital market access, which remains elusive at the current high yields.”
Though investors have turned more sour on Egypt in recent months, the country has time to “fix its issues” within the next two years and avoid a default given its better liquidity position than other distressed developing economies such as Pakistan, Bowers said.
The nation has enough reserves to cover total gross external financing needs of about $27 billion through the fiscal year ending June 30, 2024, he said.
“Obviously not ideal to draw down reserves, but in a worst case scenario we can still expect to receive a few more coupon payments before a restructuring,” he said.
–With assistance from Tarek El-Tablawy.
(Adds comments by Tellimer in 10th and 11th paragraphs.)
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