Egypt May Be Forced to Seek $3 Billion IMF Loan It Rejected: Arab Credit

2011-10-11 10:44:24

Egypt, grappling with sectarian violence, labor strikes and the highest borrowing costs since 2008, may be forced to ask the International Monetary Fund for the $3 billion loan it spurned in June.

The yield on the government’s one-year treasury bills soared 328 basis points, or 3.28 percentage points, to 13.86 percent since the Jan. 25 revolt that ousted President Hosni Mubarak, the highest since November 2008. The extra yield investors demand to hold Egyptian debt instead of U.S. Treasuries rose 160 basis points for the period to 421, according to JPMorgan Chase & Co.’s data. Middle East spreads climbed 128 basis points on average to 437, the data show.

"They must go to the IMF and the World Bank," Mona Mansour, co-director of research at Cairo-based investment bank CI Capital, said in a telephone interview. "The government will resort to foreign borrowing because this can’t continue."

Returning to the IMF risks a backlash from the activists who led this year’s revolt and objected to loans from the fund and the World Bank on the grounds that they endorsed Mubarak’s policies, said Raza Agha, an economist at Royal Bank of Scotland. Egypt is in talks with Saudi Arabia and the United Arab Emirates for $5 billion in loans to finance the budget deficit, which the government aims to reduce to 8.6 percent of economic output in the fiscal year through June 2012. The gap was 9.5 percent in the previous 12 months.

Cairo Clashes
"If they can’t get the money from the Gulf neighbors, then they could well be forced to go to the IMF again," London-based Agha said in an e-mailed answer to questions on Oct. 6. "That could lead to another confrontation with pro-democracy groups."

Egypt is also grappling with violent public outbursts eight months after Mubarak’s Feb. 11 departure. Coptic Christian protesters clashed with security forces in Cairo yesterday, killing at least 24 people and injuring 272, the state-run Middle East News Agency reported, citing the health ministry.

Prime Minister Essam Sharaf said in a televised speech that the clashes were "unjustified violence" that "raised fear and concerns about the future of this homeland" and the country’s transition to democracy. The clashes sent the benchmark EGX 30 stock index tumbling as much as 5.2 percent. The measure lost 2.5 percent, falling to the lowest level since March 2009, at 12:41 p.m. in Cairo.

Economic Policies
The government and the military have blamed violence and labor strikes for the country’s economic slowdown. Critics say the government hasn’t taken a "single meaningful economic step toward meeting the demands of the revolting Egyptians," columnist Wael Gamal wrote in the daily Al Shorouk newspaper Oct. 2, citing the lack of progress on removing energy subsidies for companies.

Protests against the government’s economic policies and the planned IMF loan contributed to the departure of Finance Minister Samir Radwan after the interim military rulers forced him to turn down the IMF and trim the deficit target by reducing investments. The IMF and Radwan denied that a loan would have come with stringent conditions.

Egypt hasn’t asked the fund for a loan, Deputy Prime Minister Hazem El Beblawi and IMF spokesman David Hawley said last week.

‘Fairly Embarrassing’
Going to the IMF would be "fairly embarrassing politically given that they got the agreement and turned it down," said Richard Fox, the London-based head of Middle East and Africa Sovereigns at Fitch Ratings. "There’s no shortage of money being pledged, particularly from the Gulf Cooperation Council, and one of the problems is that it’s quite difficult to know precisely what is likely to materialize."

The rating company cut Egypt’s credit rating one level, to BB, on Feb. 3, leaving it two levels below investment grade. Saudi Arabia has given $500 million in budget support.

Egypt has no "inhibitions" about IMF suggestions to aid the country, El Beblawi, who is also the finance minister, said in Sept. 22 interview in Washington. Public "apprehension" about foreign borrowing is forcing the government to rely on domestic banks instead of tapping international markets "though economically speaking it might be wise," he said.

The nation’s gross external debt is equivalent to 15.2 percent of gross domestic product, while the country’s gross domestic debt is 68 percent of GDP, according to data on the Ministry of Finance website.

The yield on Egypt’s 5.75 percent dollar bond due April 2020 fell 2 basis points on Oct. 7 to 5.96 percent. That’s down from this year’s high of 7.07 percent on Jan. 31. Egypt’s default risk rose 5 basis points to 465, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted in the privately negotiated market.

19th Century Loans
Some of the misgiving from borrowing abroad can be traced to an accumulation of debt in the 19th century to finance public spending. According to F. Robert Hunter in ‘The Cambridge History of Egypt,’ of the total amount received by rulers such as Khedive Ismail, the "greater part was recycled to Europe in the payment of principal and interest charges." The experience, still taught at local schools, cost the country its stake in the Suez Canal before the 1882 British invasion.

"It’s part of the culture in Egypt that foreign borrowing is associated with the loss of sovereignty and a negative impact on the economy," Mohamed Abu Basha, Cairo-based economist at EFG-Hermes Holding SAE, Egypt’s biggest publicly traded investment bank, said by e-mail.

‘Cheapest Sources’
The argument still has some resonance today. Repayments of $24.6 billion on external debt between 2000 to 2009 show that Western loans "act to extract wealth from Egypt’s poor and redistribute it to the richest banks in North America and Europe," Adam Hanieh, lecturer at the School of Oriental and Africa Studies at the University of London, wrote in May in Jadaliyya, an online magazine specialized in Middle East studies.

Still, borrowing from institutions such as the IMF "is likely to take place," EFG-Hermes’ Abu Basha said. "The IMF and the World Bank are among the cheapest sources of financing and they are more reassuring. It gives a positive message."