Egypt

Country Summary

Macroeconomic performance

Real GDP growth was an estimated 5.3% in 2018, the highest rate in a decade. The growth was associated with a decrease in unemployment to around 10% from 12% in 2017. On the supply side, recoveries in tourism and in natural gas production sustained growth. On the demand side, net exports and investment rebounded, while private household consumption weakened due to inflation. With the ongoing broad fiscal consolidation effort, the fiscal deficit declined to 9.0% in 2018, and the fiscal balance excluding interest payments (primary balance) reached a modest surplus. The debt-to-GDP ratio decreased to 92.5% in 2018 from 103% in 2017. Following the 2016 devaluation, the nominal and real effective exchange rates dropped substantially, benefiting exports due to increasing price competitiveness and improving terms of trade.

Tailwinds and headwinds

Real GDP is projected to reach 5.8% in 2020. An improved business climate is leading to a major recovery in foreign direct investment, while better security conditions benefit tourism. Moreover, the natural gas production of the Zohr field should keep rising, allowing the country to reach self-sufficiency and become a net gas exporter.

Egypt undertook impressive structural reforms in 2017–18. Landmark policies eased starting a business, strengthened legal rights, improved the bankruptcy law, and enhanced access to credit. The energy sector has become more sustainable and competitive, with improved governance. A large public investment in power generation turned the country’s power supply from shortage to surplus, and the government is planning to establish the country as a regional energy hub. Egypt’s grid, currently being expanded, should absorb the new generation capacity and serve the growing number of consumers. Bold energy tariff reforms aim to remove subsidies over 3–4 years. Moreover, the new energy sector law should enable higher private investment and stronger competitiveness.

However, the country faces headwinds. Debt, above 90% of GDP, remains high though sustainable. Servicing the debt accounts for about 30% of fiscal spending —almost 10% of GDP. Increased foreign currency– denominated debt, the opening of the capital account, and rising foreign investment in the local currency sovereign debt market increase Egypt’s sensitivity to international capital market volatility. Nevertheless, a flexible exchange rate and rising net international reserves (currently 8.5 months of imports) provide buffers. Egypt would also be adversely affected by a sharp increase in oil prices or security risks.

Water and sanitation remain key challenges for Egypt, especially given the rapidly rising population of 96.7 million. Renewable water resources average 59.3 billion cubic meters a year, while water use is 100 billion cubic meters a year. Egypt fills the gap with desalinized seawater, reuse of drainage water, shallow ground water, and treated wastewater. The government has made considerable achievements in monitoring, controlling, and minimizing water pollution on the Nile. Moreover, over four years, 80 sanitation projects have been completed, covering 414 villages, at a cost of 9 billion Egyptian pounds. Expanding and upgrading mega-urban wastewater treatment remain a top government priority.

Poverty remains a key challenge exacerbated by high inflation. The government has beefed up its poverty eradication efforts, notably through improved targeting and cash transfers. But ongoing population growth precludes Egypt from benefiting from a demographic dividend over the medium term. Thus, private sector–led inclusive growth remains paramount.

Source: African Economic Outlook 2019

Fixed Income

Summary  

The government securities yield curve extended to 20 years with five benchmark points along the curve (1.5-3-5-7 and 10 years)

Egypt is 3rd  in the ABMDI 2017 Ranking Report. 

Issuance strategy 

The debt management strategy aims at issuing gradually larger volumes of longer-dated Treasury bonds by means of constant issuance and re-openings in order to lengthen the average life of the debt stock, to consolidate the government securities yield curve, and to reduce refinancing risk.   

The strategy recommends diversifying sources of financing by issuing new instruments, such as "Sukuk" to finance development and infrastructure projects and enlarge the investor base by attracting retail investors and incorporating more non-banking financial institutions. 

To support market development and to move to a more transparent and visible phase, four steps are related to the issuance plan: 

  1. Focus on a “limited number” of benchmark maturities, namely 3, 5, 7 and 10 years. 
  2. Increase the number of re-openings of each security and raise target amount outstanding to about EGP 12-15 bn per T-Bond. 
  3. To avoid crowding, maturities are organized to be issued every other week: 1.5, 3 and  7 years T-Bonds are issued on the same day, while 5 and 10 years are issued on the following Monday. 
  4. Auctions days are organized to avoid crowding out among competing maturities. Therefore, 6-and 12-month securities are issued on Thursday, 3- and 9-month are issued on Sunday, and T-Bonds issuance takes place on Monday. 

Benchmark issues 

Egypt focuses on a limited number of benchmark maturities, precisely, 1.5-3-5-7 and 10 years to build a consolidated yield curve. The auction technique is used to sell government securities. The Government of Egypt also reopens existing line to: 

  1. Lengthen the average life of the debt stock. 
  2. Consolidate the government securities yield curve. 
  3. Reduce the refinancing risk. 
  4. Increase supply side liquidity to enhance trading volume in the secondary market. 

Yield curve 

Yield curve calculation models 

Building a benchmark yield curve is a consideration for issuance. The country built a yield curve based on the Nelson-Siegel model. This curve is an implied yield curve. 

Interpolation methods 

The linear interpolation method is used. 

Yield curve managed by

The yield curve is produced by the Central Bank of Egypt.

Display platform 

The yield curve is accessed from Bloomberg. 

Challenges in building an efficient yield curve 

  • Market fragmentation 
  • Illiquid and limited secondary market 
  • Narrow investor base 

Guide to Buying Bonds

Procedures for market participation

Before investors can trade in securities listed or traded on the Egyptian Stock Exchange (EGX), Investors are required to open a brokerage account with a licensed member of the EGX or a brokerage firm approved by the Financial Markets Authority. All investors must open accounts with the "guardians", which are primarily banks and other members. This enables the EGX to see their account balances online before all sales transactions. Trading in the Egyptian markets is through the EGX’s Trading System.

Licensed Members firms of the EGX must register their customers' orders immediately upon receipt. Members must ensure that the securities being sold are available before the execution and if members do a purchase order for securities, they must ensure that the necessary funds are available before executing the transaction.

Settlement cycle

The settlement is as follows:

  • T+0 for equities processed from intra-day trading 
  • T+1 for Treasuries processed from the Primary Dealers System
  • T+2 for all other asset classes

Taxation

No tax is levied on dividends and capital gains for investments by individuals, companies, mutual funds and international funds. In addition, there are no stamp taxes duties on investments in securities. Interest income on corporate bonds is tax-exempt. However, interest income on treasury bills is taxed at 20%. 

Egypt has signed tax treaties with the United States and the United Kingdom. Therefore, investors from these countries are taxed at 15% instead of 20%.

Rating

Rating Agency Current rating Outlook
Moody's Caa1 Stable
Fitch B- Negative
Standard and Poor's CCC+ Stable

Primary dealers

The EGX publishes the list of Primary Dealers on a daily basis on its website.  

Market restrictions

Openness to international investors 

There are no restrictions that exclude foreign investors from participating in the Egyptian capital market. Moreover, foreign investors and members of foreign firms are treated in the same way as their Egyptian counterparts.

Capital control

The transfer of proceeds of sales of foreign customers limits the attraction of the Egyptian Stock Exchange for foreign investments. Therefore, the MCDR in collaboration with the Financial Markets Authority and the Central Bank of Egypt has developed a new mechanism to transfer the value of these transactions.

Restrictions on FX and profit repatriation 

There is no rule against the repatriation of profits or capital gains. 

Documents & Resources

Documents - Ministry of Finance

Documents - Central Bank

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