LONDON, Jan 14 (IFR) - Egypt is not likely to face immediate
funding problems and the risk of a default on its sovereign debt
is low, said analysts who cover the country.
In spite of the recent fall of the Egyptian pound to
all-time lows, foreign exchange reserves dropping to USD15bn -
half of what they were two years ago - and persisting doubts as
to whether an agreement with the IMF will be reached before new
parliamentary elections in April, external aid and continuing
support from local banks will ensure the country meets all its
"Egypt is too big to fail and there remains an overwhelming
interest to see the country stabilised, both economically and
politically," said Reinhard Cluse, chief economist for Europe
and CEEMEA at UBS.
While most analysts are sceptical a deal with the IMF over a
USD4.8bn package will be sealed before the parliamentary
elections, the sovereign is expected to continue to honour its
obligations to local and foreign investors over the coming
According to Bank of America Merrill Lynch, Egypt's gross
financing needs amount to USD18.2bn in 2013. The IMF package,
combined with aid pledges made by other the European Union, the
World Bank, the African Development Bank and individual
countries, will help plug USD15.3bn of that gap. The rollover of
dollar-denominated T-bills, held for the most part by Egyptian
banks, should provide an additional USD5.8bn, according to BofA
"I think short-term default on external government debt is
unlikely," said Stephen Bailey-Smith, head of Africa research at
Standard Bank. "The dominant risk comes from hard currency
scarcity and if the present shortage creates more widespread
Selling pressure on Egyptian assets intensified in December,
as a bitterly-contested new constitution was signed into law.
Since the beginning of the new year, however, the foreign
exchange and fixed income markets seem to have embarked on
As the central banks announced a new currency system on
December 29 and put in place limits on the availability of
dollars in the economy, the Egyptian Pound plummeted to record
lows in January, and was quoted at 6.54 to the dollar on Friday.
Still, Egypt's only two outstanding international bonds, a
5.75% 2020 note and a 6.875% 2040, have recovered half of their
December losses since the beginning of the year, and ended the
week at a bid yield of 5.53% and 6.94% respectively, according
to Thomson Reuters data.
While the Egyptian government has stressed on multiple
occasions its intention to tap the international bond market,
potentially with a sukuk issue, analysts have divergent opinions
on whether this would be a good move for the sovereign at this
"From the government's perspective, launching a sovereign
Eurobond now is not very sensible. It would be relatively
expensive and they would have to pay an uncertainty premium,"
said UBS's Cluse.
Others note, however, that issuing bonds internationally
could help Egypt, which is rated B2/B-/B+, reduce the country's
reliance on domestic banks and help free up lending to the
"There has been some reluctance to issue international debt,
and this has crowded out private sector lending as domestic
banks lend primarily to the government," noted Gabriel Sterne,
senior economist at Exotix. "With such low external debt levels
and relatively low yields on the outstanding Eurobonds, I think
there is a huge capacity for Egypt to tap the international
While risks over Egypt's political and financial stability
continue to loom, analysts note that appetite for emerging
markets sovereign debt remains at record highs. "Ironically,
because of global conditions this is actually not a bad time for
the government to issue external debt. They would probably print
at the same price as three years ago," noted Standard Bank's
"These are attractive issuance levels, especially if you
consider that funding locally in Egyptian pounds will presently
cost them as much as 17% on a 10-year tenor."
According to some, the recent rally in Egyptian equities and
Eurobonds suggests investors can see beyond the present impasse.
Other observers, however, say that for investors willing to get
exposure to Egypt the stakes remain high.
"I believe the next few months could be difficult. Political
pressures might not come down quickly, and risks are still
looming," said Cluse. "This should be a big disclaimer for
international investors putting money into these bonds."
(Reporting by Davide Scigliuzzo; Editing by Sudip Roy)