Breakfast Wrap: Egypt Debt Default, Algeria Life Line, Abu Dhabi Debt Clampdown

While Egypt’s government deliberates over what economic plan they will present to the IMF to show they deserve almost $5 billion, the North African nation’s level of economic risk remains high.

Egypt is among 10 countries likely to default on its sovereign debt within five years, data from CMA shows.

Credit default swap (CDS) spreads, or the cost of insuring Egypt’s debt against default, is among the highest in the world.  Even so, CDS spreads in Egypt stabilised following a volatile election in the second quarter, with spreads coming in nearly 29% to close at 438 basis points from 617 basis points.

Again in English?

CDS spreads are a barometer of risk.  The wider the spreads (or the higher the basis points) the more expensive it is to insure against a default or restructuring.  It is like a young 23 year old male buying car insurance; he will be paying a lot to cover the perceived high level of risk associated with a young driver.

The cost of insuring Egypt’s debt against default jumped to its highest in 3-1/2 years on in June to 715 basis basis points after allegations of fraud delayed the result of Egypt’s presidential election.

That risk decreased slightly after the presidential elections but not enough and Egypt is still considered among the riskiest economies in the world, along with countries facing a massive financial crisis including Greece and Portugal. 

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Amid the risk, Egypt is working hard to ensure it has enough money.  It needs help from foreign donors to rein in its budget deficit and avert a balance of payments crisis until it can secure a $4.8 billion loan from the IMF.

Algeria is the latest country to be cited as a potential donor.  Egypt’s government will discuss gaining assistance worth $2 billion from Algeria during a visit to the country by Prime Minister Hisham Kandil.

This loan will be injected into the central bank, according to local newspaper reports.  In other words, Algeria will be supporting Egypt’s local currency like Saudi Arabia and Qatar have done.  

Killing two birds with one stone, Mr Kandil may also look to Algeria to plug a gap in the nation’s butane gas supply. 

Strong demand for natural gas and relatively high world energy prices have helped Algeria add this year to a foreign exchange reserve pile that was worth more than $186 billion at the end of June, Reuters reported.

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An interesting round-up from Forbes on how Egypt is gently pushing towards green energy alternatives as non-renewable energy falls short of demand.

Earlier this month, Egypt’s Supreme Council of Energy began taking steps towards reversing course by offering tax exceptions for green energy components and access to state-controlled land as long as it would be used for solar and wind projects, Forbes reported.

Here’s the crux of the government’s plan:

The new regulations would offer exemptions on customs and taxes for parts and components used in renewable energy efforts. The new framework would also offer the chance for the “allocation of plots of land belonging to the Renewable Energy Authority would be made available to private companies working in the field.”

The story touches on how phasing out energy subsidies would be one exception to more efficient use of fossil fuels.  But the story ends like this:

However, considering the national mood at the moment, delivering that news to a public already aggravated by blackouts and energy instability could be a tough act to take on.

What isn’t considered here is how blackouts and energy instability are inherently linked to energy subsidies, as Rebel Economy has pointed out in the past.

It is in the public’s best interest to deliver that bad news to prevent further electricity black-outs and energy instability in the future.  

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Abu Dhabi is finally attempting to rein in boom-year borrowing that has triggered bailouts of state-linked companies and losses in parts of its swelling global investment portfolio by quietly issuing its own tougher policy for debts taken on by government-owned businesses, Camilla Hall writes in the FT.

Ultimately it means all state-borrowing needs to get an approval stamp from the executive council, an advisory body overseen by Sheikh Hazza bin Zayed Al-Nahyan, a powerful brother of the UAE president, Sheikh Khalifa bin Zayed Al-Nahyan, Ms Hall writes.

It’s a strong message to state-linked companies that Abu Dhabi won’t pick up the tab for over spending and spiralling debts.

The only potential flaw with this system is that many state-linked companies have board members and senior executives linked to the Abu Dhabi government.  Most companies have members of the royal family in senior positions.  It may be difficult to follow through on this clampdown if a family member is involved.

Also, the perception that these companies can fall back on the oil rich Abu Dhabi government will be hard to shake off. 

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Not long after Morocco was granted a $6.2 billion precautionary line of credit from the IMF, and from the European Bank for Reconstruction and Development, the North African country expects to receive early next year the first part of $2.5 billion in aid it was promised by wealthy Gulf Arab states.

Saudi Arabia, Qatar, UAE and Kuwait last year agreed to disburse that sum to Morocco and the same amount to Jordan.

It is a powerful example of the vote of confidence international banks give a country once they approve funding or loans.  It is no coincidence this money is being released after two major transactions were approved.  It is the example Egypt should look at to speed up the signing of its IMF loan.




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