Egypt debt costs reflect political woe

Egypt's credit default swaps increased 79 basis points to 486 during the biggest and most violent clashes since Mohammed Morsi was elected into office. Shawn Baldwin / Bloomberg News

The cost of insuring Egyptian sovereign debt against default rose more than anywhere else in the world in the past month, indicating investors have little faith in president Mohammed Morsi's prospects of restoring stability.

Egypt's credit default swaps increased 79 basis points to 486 during the biggest and most violent clashes since Mr Morsi was elected into office, with protesters threatening to boycott the draft constitution.

"It's definitely not a good sign," said Wafik Dawood, the head of institutional sales at Mega Investments Securities based in Cairo. "The rise reflects the lack of confidence in Egypt's economy from international institutions."

Credit default swaps reflect the market's perception of an issuer's likelihood of default.

The acceleration to 486 is still far below the 600 level witnessed during the peak of the revolution last year.

On Sunday, the Muslim Brotherhood's Freedom and Justice Party said 4.6 million, or 56.5 per cent, backed the constitutional changes in a referendum. But turnout was estimated at 33 per cent, which, if accurate, would be far below the 43.4 per cent of Egyptians who voted during the presidential elections.

Two years after the popular uprising that ousted the then president Hosni Mubarak, Egypt's economy is in a dire state. Foreign currency reserves last month stood at US$15.04 billion (Dh55.24bn), down from $36bn in December 2010, according to central bank data. Moody's Investors Service rates debt-ridden Egypt a junk grade of B2.

A much-needed $4.8bn loan from the IMF, which was supposed to have come into effect this month, was postponed until next month to allow for time for the government to explain a package of unpopular austerity measures to the Egyptian people.

Mohamed El Orabi, Egypt's former foreign minister, said he was not worried about the delay, in an exclusive interview with The National.

"I still remember that we started this discussion a few months after the revolution, and we survived after this. It's now been almost two years," he said.

The idea is not the money itself, the idea is that we get the sort of certificate, that we have a credible economy and that there is trust in our economy."

Egypt's stock market lost 45 per cent of its value last year as foreign investor appetite for riskier assets was cut following the popular uprisings that toppled Mr Mubarak.

The EGX30 Index recovered this year, up 46 per cent, establishing a ranking among the top performing markets in the world after the parliamentary and presidential elections offered a sense of political calm following the revolution.

"There is a slight disconnect at the moment between the overall credit picture with credit default swaps moving a lot wider and the currency weakening," said Julian Bruce,the EFG Hermes director of institutional equity sales. "It would seem to a certain extent that equity investors are still comfortable with their investments even though credit and the macroeconomic picture would indicate a worsening situation."

Egypt-based lenders have already become vulnerable takeover targets by regional players.

In September, QInvest finalised an agreement with Egypt's EFG Hermes to spin off its investment banking operations to create a joint venture in which the Qatari investment bank would control 60 per cent. Qatar National Bank will buy Société Générale's Egyptian subsidiary for $2bn. The deal will be finalised in the first half of next year, Reuters reported last week.