International Investors Absent From Egypt’s Bond Auction

In the midst of continued political upheaval, Egypt’s central bank sold off 13 billion Egyptian pounds ($2.2 billion) worth of treasury bills to the country’s local banks on Monday. The average yield of the T-bills was 11 percent, up 1.5 percent from the last government debt sale that was held shortly before anti-government demonstrations began two weeks ago. But, despite higher yields, international investors were conspicuously absent from yesterday’s short-term bond auction.

At the same time, Monday also saw the Egyptian pound fall to its lowest level in six years -- 5.953 per-dollar -- as many international investors moved quickly to reduce their exposures to Egypt after the banks reopened.

Some investors are now acknowledging that Egypt’s political uncertainty is contributing to a deep financial malaise.

“The country’s not going be stable anymore,” says Tariq Qaqish, a director and fund manager in the asset management division of UAE-based investment bank Al Mal Capital. “The macro [economic] picture is changing, and the political picture is changing,” he adds.

Qaqish thinks investors, including himself, will be very hesitant to allocate investments towards Egypt in the near future.

Meanwhile, as the currency is further devalued, food prices for Egyptians -- whose country is one of the world’s largest wheat importers -- will continue to rise dramatically. As such, Qaqish warns that any future government will be forced to increase subsidies, thus putting more pressure on the already debt-laden economy. 

Inflation, hovering above 11 percent, also remains a significant economic challenge.

Charles Howlett, a senior equity research analyst at London-based Matterhorn Investment Management, an emerging markets firm, says he was quite interested in Egypt’s macro situation when he visited in November, well before the turmoil erupted. “But, I held off buying anything because of inflation,” he explains. Howlett believes that as long as Egypt’s political uncertainty persists, the more the country’s fiscal crisis will deepen.

But other investors -- many no-doubt anticipating a big sell-off when the stock market reopens this coming Sunday -- see a long-term opportunity in Egypt’s political and economic disarray. 

“We will be taking advantage of the situation,” says Daniel Broby, CIO of London-based Silk Invest, an asset management boutique that targets Africa and the Middle East. Broby says the situation in Egypt has triggered a “financial contagion,” impairing asset prices in that country and other Middle Eastern states, including Bahrain.

“[We] raised cash levels to 7 percent in the broader MENA region in order to take advantage of opportunities and distressed valuations in Egypt when the market reopens,” he adds.

Broby’s strategy is to invest now and wait out the political unrest in Egypt, until assets rebound. “The changes -- greater transparency, more freedoms -- can only lead, longer-term, to higher GDP growth, and that can only lead to higher asset valuation,” Broby argues.

Gary Greenberg, an emerging managers product specialist at London-based Hermes Fund Managers, agrees. “More democracy and more representation will be probably be a good thing,” he says. Greenberg, too, is anticipating opportunities when the Egyptian market reopens. “We’re watching it very closely,” he explains, adding, “We are quite familiar with a number of companies on the market and are in touch with them.”

Qaqish and Howlett are more skeptical.

“Mubarak,” Howlett reminds, “is very pro-business.” He takes pains to underline that nothing is clear yet, but Howlett acknowledges a potential risk that some business-friendly reforms implemented under Mubarak -- lower taxes for the wealthy, public-private partnerships -- could be reversed under a new Egyptian leadership.

“The suggestion is that business groups have been close to the government...[they] could be punished,” Howlett says.

And while Qaqish thinks the political transformation underway in Egypt is “positive for the [Arab] street,” he also admits, “some major shareholders of listed companies in Egypt will be squeezed if Mubarak leaves, and will lose ground.”