Figures obtained by Daily News Egypt indicate that the government intends to expand the borrowing from the local debt market to bridge the chronic deficit in the state budget significantly during the first quarter (Q1) of the fiscal year (FY) 2019/20.
According to those figures, the ministry of finance intends to offer treasury bills (T-Bills) and treasury bonds (T-Bonds) worth EGP 522bn during the period from July 1 to the end of September. This is the largest rate of borrowing through debt instruments since the launch of these tools on the market.
The state budget deficit is expected to reach EGP 445.1bn at the end of the FY 2019/20.
A plan by the ministry of finance, obtained by Daily News Egypt, reveals that the government is targeting issuing T-Bills worth EGP 490.75bn and T-Bonds worth EGP 31.25bn.
The Central Bank of Egypt (CBE), which is carrying out the task on behalf of the government, is offering bids for T-Bonds and T-Bills in July worth EGP 200.5bn, offers worth EGP 160.75bn in August, and offers worth EGP 160.75bn in September.
According to the plan, three-month T-Bills worth EGP 118.75bn, six-month T-Bills worth EGP 121.75bn, nine-month T-Bills worth EGP 125bn, and 12-month T-bills worth EGP 125.25bn will be offered.
The government’s plan also includes the issue of three-year bonds due in June 2022 worth EGP 5bn and three-year bonds worth EGP 2.5bn to be due in September 2022.
The ministry will also offer five-year bonds worth EGP 8.75bn due in July 2024 and seven-year EGP 2bn worth of bonds to mature in April 2026.
Moreover, it will float seven-year bonds due in August 2026 worth EGP 5bn and 10-year bonds maturing in May 2029 that are worth EGP 8bn.
According to the ministry of finance, the volume of outstanding balances of T-Bills and T-Bonds is in local currency until the end of April 2019 until it reached EGP 1.852tn, including EGP 1.151tn of T-Bills and EGP 701.188bn of T-Bonds.
Banks working in the Egyptian market are considered the largest investors in T-Bonds and T-Bills, which the government issues on a regular basis to cover the state’s budget deficit.
T-Bonds and T-Bills are proposed through 15 banks, which are the principal dealers in the primary market. These banks resell a portion of these T-Bills and T-Bonds in the secondary market to retail investors, as well as to local, and foreign institutions.
The Minister of Finance, Mohamed Moeit, said in recent remarks that the government is working on several axes to reduce public debt, pointing out that Egypt aims to reduce the budget deficit during the current FY 2018/19 to 8.4% of the GDP then to under 7% in FY 2019/20.
He added that the ministry also aims to reduce the debt ratio of the domestic product to reach 98% of GDP in 2018/19 instead of 108% of the GDP the previous year then to 92% in 2019/20.
According to CBE data, local public debt has reached EGP 4.107tn at the end of December 2018 against EGP 3.695tn at the end of June 2018.
The CBE said that 85.3% of public debt worth EGP 3.504tn is owed by the government, economic public agencies hold 6.4% of total public debt worth EGP 340bn, and 6.4% is owed by the National Investment Bank worth EGP 263.1bn.
For its part, Deutsche Bank noted that the Q1 of 2019, ending in March, witnessed a record increase in debt issues that reached EGP 509bn. This is much higher than the estimated figure of EGP 474bn, while Q2, ending in June, saw the issuance of EGP 479bn.
Thus, the net supply after depreciation increased to about EGP 70bn, up from EGP 60bn in 2018. The bank expected the rate of issuance to increase in conjunction with a busy schedule of recoveries, where Q3 will see the depreciation of EGP 450bn.
The bank pointed out in a report that, although T-Bills account for 95% of supply, T-Bonds are gaining grounds since Q2 of the year amid low demand on T-Bills against constant demand on T-Bills in April to mid-May, unlike Q1, which saw high demand on T-Bills.
It added that the 3.5-year T-bonds accounts for the largest share of investments which is worth 60% of outstanding balances, then 10-year bonds (22%) and 7-year bonds (18%).
The report said that the ministry of finance has succeeded in improving the structure of its issuance by increasing the issuance of T-Bonds and rates on return close to the interest on T-Bonds.
It noted that it preferred to keep local assets with the preference for T-Bills over T-Bonds in the summer months then give preference for T-Bonds in Q4 with the trend to reduce interest.
It added that the real returns are not the most attractive in emerging markets, compared to Ukraine or Turkey, but also predicted that inflation dynamics would significantly improve in the second half.
The report recommends not building major financial centres of Egypt’s international T-Bonds amid the uncertainty after the conclusion of the International Monetary Fund (IMF) programme, especially with more attractive opportunities, such as Argentina, on the table.