March 17, 2020 / 3:48 PM / 19 days ago

Egypt central bank emergency rate cut adds pressure to outflows

DUBAI/CAIRO, March 17 (Reuters) - A surprise rate cut by the Egyptian central bank aimed at stemming the economic impact of the coronavirus outbreak has added pressure to the country’s debt securities, as holders of government paper continued to dump it in international markets.

The Egyptian central bank slashed its main interest rates by 300 basis points at an unscheduled meeting on Monday, saying it was a “pre-emptive” move to support the economy. Egypt has registered 166 cases of coronavirus so far.

The outbreak – which is having a crippling impact on the global economy – is set to damage Egypt’s vital tourism sector, which accounts for about 12% of gross domestic product.

The central bank move, however, has added further pressure to Egyptian foreign debt securities, which have been suffering since the end of February as part of a wider emerging market sell-off.

“The market has likely seen some notable outflows in the past couple of weeks” that were evident in a 1.3% weakening of the Egyptian pound against the dollar, EFG Hermes economist Mohamed Abu Basha wrote on Tuesday.

“We think these outflows, driven by the global risk aversion, would continue and might actually accelerate in the short term in light of rising uncertainty,” he said.

Amounts of treasury bills sold at central bank auctions have dropped sharply since early February. The central bank sold only 92 million Egyptian pounds ($5.86 million) of 91-day treasury bills at an auction on Monday, down from 1.5 billion pounds at a similar auction on Jan. 28. Both Egyptian and foreign investors take part in the auctions.

International bond yields due in 2040 rose by 15 basis points on Tuesday while – by comparison – yields on similarly rated Bahraini dollar bonds due in 2047 rose by 5 basis points. Egyptian U.S. dollar-denominated paper due in 2029 worsened by about 15 basis points too, while their counterparts in Bahrain improved slightly.

“The central bank unexpectedly cut interest rates by 300bps which caused a sell-off of both local and international bonds. It makes local debt less attractive which might accelerate portfolio outflows,” said Zeina Rizk, fixed income executive director at Dubai’s Arqaam Capital.

Stock markets have also suffered in Egypt, where the main index has plunged over 30% since late February, when coronavirus fears escalated.

On Tuesday, Egypt’s index retreated 2.4% with 25 of 30 stocks in the red, ending the day at its lowest level since Nov. 3, 2016 - the day Egypt devalued its currency at the start of a three-year, IMF-backed economic reform programme.

According to Rizk, pressure on Egypt’s current account, from a decline in tourism, and on its capital account, from portfolio flows, could strain the local currency too.

Foreign holdings of Egyptian government debt, including bills and bonds, have been rising over the past few years after Egypt devalued its currency and embarked on austerity measures to cut the deficit.

Some analysts said local debt interest rates remained high, despite the central bank cuts.

Egypt’s domestic government bond market has been a hit with investors hunting for yield in a world where central banks are pushing interest rates ever lower.

Foreign customers held 289.43 billion pounds in treasury bills at the end of January, up from 532 million at end-June 2016, shortly before Egypt devalued its currency as part of an IMF-backed economic reform package. ($1 = 15.7000 Egyptian pounds) (Reporting by Davide Barbuscia, Yousef Saba, Marc Jones and Patrick Werr, Editing by William Maclean)

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