Borrowing costs surge amid further Egypt unrest

Egypt's borrowing costs surged to the highest level yesterday since unrest in January as a second wave of protests hamper the country's already pressing financial needs.

HSBC estimates that the Egyptian economy has lost up to $40 billion since the ousting of Hosni Mubarak in February Amr Nabil / AP Photo

Egypt's borrowing costs surged to their highest level yesterday since the unrest in January as a second wave of protests hamper the country's ability to address its pressing financial needs and risk a deterioration in the economy.

The widening yield on Egypt's benchmark dollar bonds followed demonstrators seeking a civilian government rejecting concessions made by the country's military rulers.

The yield on the government's 5.75 per cent bonds due in 2020 rose 9 basis points to 6.96 per cent.

"In an environment like this one where uncertainty is still so pronounced, access to foreign capital is going to remain difficult and expensive," said Simon Williams, the chief economist of HSBC for the Middle East and North Africa (Mena). "Domestic investors are likely to remain hesitant until they have clarity on the political order emerging."

Angry demonstrations flared again in Cairo's Tahrir Square yesterday despite a pledge by Field Marshal Mohamed Hussein Tantawi, the head of Egypt's ruling military council, for an accelerated handover to civilian power with presidential elections by the end of June. Each day of violence risks worsening the country's financing gap, say economists.

Between US$30 billion (Dh110.19bn) and $40bn is estimated by HSBC to have already been shorn from Egypt's economic output since the ousting of Hosni Mubarak from the presidency in February and the ensuing political uncertainty.

The instability is complicating the country's plans to seek external funding assistance. Hazem El Beblawi, the deputy prime minister, said last week Egypt may ask the IMF for a $3bn loan it turned down this year.

That amount remains at the "low end" of what Egypt would be likely to need in the coming years, estimates Capital Economics.

"As things stand the total external financing requirement for 2012 will be closer to $10bn," Neil Shearing and Said Hirsh, economists at Capital Economics, wrote in a research note. "But with the political situation going from bad to worse, there is a risk that capital outflows will accelerate, thus increasing the size of external support that might ultimately be required."

A flight of foreign investment and tourism means Egypt's net foreign reserves have slipped from $36bn at the start of the year to $22.1bn last month. Much of the spent reserves have helped to support the Egyptian pound's spending power.

But fresh outbreaks of unrest are placing the currency under renewed pressure as speculation intensifies about whether the central bank's firepower will drain away. The currency fell 0.1 per cent yesterday to 5.9955 per dollar.

There were "clear question marks" over the ability of the Egyptian central bank to keep supporting it, Mr Williams and Liz Martins, a Mena economist at HSBC, wrote in a research note.

"Although we are bearish longer term, we think a disorderly decline in the Egyptian pound is the last thing the central bank will want to see amid the current turmoil," they wrote. "Having come this far down the road - at a cost of over $20bn - we think it will maintain its policy of supporting the pound until the political scene stabilises."

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