Egypt's decision to seek $3 billion (Dh11.01 billion) from the International Monetary Fund may fail to win the confidence of bond investors concerned that violence risks disrupting the country's transition to democracy.
At least 20 people were killed and hundreds injured in clashes between protesters and police since Saturday, one day after Finance Minister Hazem Al Beblawi said the government agreed "in principle" to ask the IMF for the loan the country had rejected. The unrest sent Egypt's default risk soaring 55 basis points, or 0.55 percentage points, yesterday to 525, the highest level since March 2009, according to data provider CMA. The Egyptian pound weakened to a six-year low.
Investors are retreating as the military, which has ruled Egypt since the expulsion of President Hosni Mubarak in February, may delay handing over power, said Schroder Investment Management Ltd's Rami Sidani. The extra yield investors demand to hold Egypt's debt over US Treasuries surged 31 basis points, or 0.31 percentage point, last week to 456, JPMorgan Chase & Co data show. Middle East spreads rose six basis points to 427.
While IMF money may help ease pressure on government finances, a "vacuum on the political front is the investors' biggest enemy", said Dubai-based Sidani, head of Middle East and North Africa investments at Schroder, which oversees about $230 billion worldwide. "It's more the succession of power and the handover of power to the politicians that will definitely help restore confidence."
The clashes followed a rally in Cairo against military rule. The Supreme Council of the Armed Forces said the violence will not delay the start of parliamentary elections on November 28. The generals have vowed to stay in charge until after a presidential vote, for which no date has been set.
Egypt's default risk is now the highest in the region, according to CMA, which is owned by CME Group Inc and compiles prices quoted by dealers in the privately negotiated market. Credit default swaps for Tunisia, where a revolt toppled the president in January rose 10 basis points to 275 on November 18, the data show.
The benchmark stock index plunged 4 per cent to 3,860.99 at the 2:30pm close, the lowest level since March 2009. The pound fell 0.1 per cent to 5.9888 a dollar at 3:14pm in Cairo.
Egypt raised 2 billion pounds (Dh1.22 billion) from the sale of nine-month securities on Sunday, out of the 3.5 billion it sought, according to central bank data on Bloomberg. The yield on nine-month treasury bills up 45 basis points to 14.71 per cent at a sale on Sunday, the highest level since Bloomberg started tracking the data in 2006. The Finance Ministry also sold 1.5 billion pounds in three-month notes, with the average yield rising 71 basis points to 13.490 per cent.
The government decided to seek IMF funds because domestic borrowing "has reached high limits", Al Beblawi, who is also the deputy prime minister, said by phone November 18. The military won't object to the decision, he said.
Egypt reversed course in June and said it wouldn't be taking the IMF loan it had announced three weeks earlier. Then-finance minister Samir Radwan, who lost his job in a July reshuffle, said in an interview that the military vetoed the loan after a "damaging" media campaign because the IMF was seen as tainted for endorsing the economic policies of the Mubarak regime.
He said in July the loan came with no strings attached at a total cost of 2.5 per cent.
Since then, the yield on Egypt's one-year treasury bills jumped 174 basis points to 14.725 per cent, seven basis points less than a peak in September 2008. Moody's Investors Service lowered the country's credit worthiness for a third time this year on October 27 to B1, four levels below investment grade. Foreign reserves declined about $14 billion this year to $22.1 billion in October, central bank data show.
"They should have accepted it a long time ago," Moustafa Assal, head of fixed-income at Cairo-based investment bank Beltone Financial Holding, said by phone on Sunday. "Egypt needs help because it's now a question of being able to buy basic commodities such as wheat and sugar for 85 million people."
The world's top wheat importer may see its budget deficit widen to more than 10 per cent of gross domestic product in the fiscal year through June, Moody's said on October 27. The government is targeting a gap of 8.6 per cent.
An IMF lending program may come with conditions and accepting it would show that the government "is serious enough to sticking to certain budget conditions", Sidani said by phone on Sunday. Egypt should have accepted the initial loan instead of waiting for aid from members of the Gulf Cooperation Council, he said.