Egypt’s
attempts to lower borrowing costs and spur economic growth are stumbling
because the country’s banking sector is loath to allow rival players into the
lucrative treasury bond market.
The
government, which has been trying for years to expand debt markets that lag far
behind its equity markets in size, said in September it had almost completed a
new legal framework for bond trading
Egypt
has been attracting increased interest from emerging market investors because
of its sturdy growth, heading towards six percent a year, despite a cloudy global
outlook.
Investors
have also been lured by high local bond and T-bill yields compared to US and
other more developed markets. That growing appetite has created an even more
pressing need to make its securities market more liquid, analysts say.
But
the 15 commercial banks that have the sole right to buy treasury bills and
bonds directly from the government are unlikely to easily give up a cosy
arrangement that allows them to sit on easy and risk-free sovereign debt.
Because
it is hard for investors to resell securities on Egypt’s thinly-trading
secondary market, the government must pay a risk premium on its debt, leaving
it less money for domestic spending that could spur the economy.
“It’s
not difficult to fix it. There is a blueprint out there, and they just need to
press the button,” said Ahmed Alanani, director of fixed income sales at
Exotix in Dubai.
“What
disappoints me is that similar reform measures were taken by other countries
such as Turkey and Malaysia, which have a similar macroeconomic picture, except
they now have a far more developed fixed-income market than Egypt ever
could,” he said.
Egyptian
treasury bills have become more attractive to foreigners, who have taken
advantage of a flood of cheap dollars to buy Egyptian government paper through
the 15 commercial banks. The yield on T-bills has been around 9 or 10 percent.
Foreign
treasury bills holdings soared to EGP64.8bn ($11.2bn) in September from EGP10.2bn
in September 2009, according to central bank statistics.
The
foreign purchases has helped the government finance its large deficit without
crowding private borrowers out of the market. The deficit reached 8.1 percent
of gross domestic product in the year to the end of June.
Despite
a surge in demand, analysts said the government has had to pay a higher yield,
or an illiquidity premium, on the securities they offer because of the
difficulties investors face if they want to sell the instruments before
maturity.
Analysts
say an active secondary market for government paper could also encourage
corporate bond issues. Only a handful of Egyptian firms – Mobinil, Ezz Steel, GB
Auto and Orascom Construction Industries – have bonds outstanding, and these
trade infrequently.
One
official said Egypt’s conservative central bank is among the actors least
interested in changes to the present system.
“They
have a very provincial view of the banking system. A banking system for them is
a retail bank. And a retail bank that is conservative,” said the source
who was involved in efforts to reform bond trading. He asked not to be
identified.
The
central bank “could have forced the banks to trade in government paper,
they could have put limits on how much government paper a bank is allowed to
hold, all sorts of things you can do that they are not doing,” the source
added.
Among
the measures suggested to spur bond trading are to force the 15 primary dealer
banks to act as market makers by regularly setting prices at which they would
be obliged to buy and sell the government securities they hold.
“There
should be some sort of requirement that every bank after getting government
bonds sell 20 percent of them,” Pharos Holding Chairman Mohamed Taymour
said in Cairo.
Finance
Minister Youssef Boutros-Ghali said in November the government had no immediate
plans to demand banks act as market makers, saying this would need new
legislation.
Another
measure would be to allow investment banks to act as primary dealers alongside
the 15 licensed banks.
The
ministries of finance and investment approved such a plan last year. None of
them have so far been granted a licence.
“I
have been campaigning really hard for brokers to enter government bonds, I
talked to everybody and everybody says ‘yes, yes, we are for it’. But it is not
happening,” Taymour said.
A
second investment bank analyst said the central bank did not want independent
players in the government securities market.
“It
must give the final approval for investment banks to act as primary dealers,
and so far it hasn’t given any,” said the analyst, who asked not to be
named.
Analysts
said it would be easy for the central bank to quash attempts at reform by
arguing that the present system has been running perfectly well and any changes
might draw hot money in, which could just as easily flow out and unsettle the
market.
“If
think they just would have had to whisper tales of volatility and that would
have had an effect,” said one analyst based outside of Egypt.
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