Egypt

Country Summary

Economic performance and outlook: In 2016/17, real GDP grew an estimated 4.1%, slightly underperforming the 4.3% in 2015/16. Growth is driven mainly by investment and private and public consumption, as well as by net exports, which contributed positively for the first time in two years. This positive performance reflects the government’s reform efforts to achieve fiscal consolidation, more inclusive growth, and an improved business environment. The approval of a three-year International Monetary Fund (IMF) program in November 2016 showed the success of those efforts. Growth is projected to be 4.8% in 2017/18 and 5.5% in 2018/19, boosted by restored investor confidence but partially diluted by high inflation. Inflation rose to an estimated 23.3% in 2016/17, from 10.3% in 2015/16, and is projected to decline to 21.2% in 2017/18 and 13.7% in 2018/19. 

Macroeconomic evolution: After facing important imbalances that led to high public debt, a widening current account deficit, and declining official reserves, Egypt embarked on a major IMF-backed economic reform initiative. It consists of exchange rate liberalization; fiscal consolidation, including energy subsidy cuts and reduction of the wage bill; and business climate improvement, including easier access to financing for small- and medium-size enterprises, mainly through targeted cash transfers for the most vulnerable. Macroeconomic conditions show signs of improvement. On the demand side, the Ministry of Finance’s July 2016–March 2017 data indicate year-on-year growth of 17% for investment, 4.4% for private consumption, and 2.4% for public consumption. The 72% increase in exports was partly offset by the 47% increase in imports. On the supply side, eight key sectors, representing about two-thirds of GDP, led growth: telecommunications (grew 9.3%), construction (grew 8.5%), wholesale and retail trade (grew 4.7%), nonoil manufacturing (grew 4.7%), natural gas (grew 4.6%), real estate (grew 4.3%), agriculture (grew 3.1), and general government (grew 2.9%). Tourism declined 6.7%. 

Tailwinds: The IMF-supported homegrown reforms, backed by the World Bank and the African Development Bank through budget support of $4.5 billion over three fiscal years, are paying off. Currency depreciation boosted foreign direct investment, the economy is considered more competitive, and business confidence has improved. Public investment, through a series of megaprojects, boosted growth in 2016/17. Better markets conditions have been a main factor in the return to growth, particularly benefitting exports, led by mining products, especially gold and oil (mostly crude petroleum). The program’s fiscal consolidation aspect—which includes increasing tax revenues 2.5% from 2015/16 to 2018/19; reducing public expenditure by slashing subsidies, notably to fuel; and containing the government wage bill—has improved the macroeconomic environment. The government will implement the ongoing IMF–World Bank–African Development Bank program to consolidate the positive impact to date and enhance future prospects. 

Headwinds: Moving the exchange rate to a floating regime resulted in depreciation of the Egyptian pound by 44% between October and November 2016. Inflation reached 31.9% in August 2017, after averaging 23.3% in 2016/17. Real interest rates remain negative despite steady increases in nominal interest rates. However, inflation is expected to decline to 21.2% in 2017/18 and 13.7% in 2018/19, as the Central Bank tightens monetary policy to support the Egyptian pound and reduce inflation. Another impact of the currency depreciation was the sharp increase in the stock of foreign currency–denominated debt, from 17.3% of GDP during the first quarter of 2016/17 to 41.2% a year later. Another aspect affecting growth is the security situation in the north-eastern part of the country, as well as warnings that affect the tourism sector, which has yet to return to its pre-2011 levels.

Source: African Economic Outlook 2018

Source: African Economic Outlook 2018

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 AgencyCurrent ratingOutlook
Moody'sCaa1Stable
FitchB-Negative
Standard and Poor'sCCC+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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