Category Archives: Fixed Income

The Wrap: Egypt Factories Shutdown, Syria War Economy Thrives

  • EGYPT 

– Egypt’s central bank held a bumper auction on Wednesday, selling $1.3 billion from its foreign reserves to cover strategic imports such as wheat, meat and cooking oil.  As the country grapples with an economic crisis, the central bank’s foreign currency sales are an attempt to keep the pound strong and reassure the nation that the government can afford basic commodities.

But as Patrick Werr, economics reporter at Reuters writes:

Despite the sales and a more expensive dollar, businesses have racked up hundreds of millions in unfulfilled requests for foreign currency, forcing them to turn to a black market that has mushroomed in recent months.

The pound has depreciated on the black market, showing that a strengthening pound on the official market isn’t as accurate as the central bank may want to convey. 

More than 600 factories have shut down in Egypt in recent months, the country’s trade minister said in an attempt to correct a statement from the minister of manpower Kamal Abu-Eita, who announced a few weeks ago that more than 4,500 factories had closed in Egypt. The latter figure had come from a Centre for Trade Union and Worker Services report released earlier this year, but the methodology was questioned.

The fact that the new trade minister Mounir Fakhry Abdel Nour is trying to downplay the number of closures is not a very good sign, but it’s an even worse signal that he’s questioning the figures of his colleague. 

Either way, even at just 613 factories, that is a big blow to Egypt’s industrial sector, one of the major backbones for the economy. Though the Morsi administration and the caretaker government before that had discussed investing money to re-open factories, nothing ever came to fruition.

Many of these factories are hit by multiple problems including power cuts, strikes, poor security, and difficulty securing loans in credit markets where they are squeezed out by an indebted government.

  • SYRIA 

– Syria’s war economy has created a thriving underground black market, this fascinating Reuters report explains.

As state buyers face growing problems trying to purchase food from foreign suppliers because funds are frozen in bank accounts abroad, middlemen and small companies working with shipping agents are finding ways to do profitable business, operating from neighbouring countries such as Lebanon.

That is even more important at a time when Damascus has had to cancel a number of tenders to buy wheat, sugar and rice. It’s part of a growing shift in the way Syria trades with neighbouring economies, especially rewarding for those willing to take the risk. 

– 400 litres of mazut (or heating oil) are promised for each Syrian citizen as regime insists it has enough fuel to cover domestic demand, Syrian News reports. 

Though Syria doesn’t produce a lot of oil, it relies on imports to keep up with demand. But the war has severed ties with many of its fuel providers including oil traders in the European Union and dramatically impaired the ability to buy fuel because of dwindling reserves. Rolling power cuts and oil shortages now plague Syrians, forcing many to turn to the expensive black market.

Unfortunately, promises by the Assad regime that it will provide more fuel to Syrians are rarely fulfilled.

Why Egypt’s Pound Isn’t Strengthening

Take a look at this chart, which the Central Bank has been proudly parading this month:

[caption id="attachment_1917" align="aligncenter" width="552"]Bloomberg Bloomberg[/caption]

It shows how the pound’s official price, controlled by the central bank, has been appreciating slowly since the overthrow of Islamist president Mohammed Morsi. 

If we were to take this graph at face value, we might conclude that the pound has strengthened as the interim government (and military) took over, and billions of dollars worth of Gulf aid is helping the country’s currency stabilise.

However, traders on the black market tell a very different story, and say the Central Bank is ensuring the pound strengthens just to give the impression that the economy is stable and improving despite the turmoil.

Here, where the pound is traded illegally, the domestic currency has actually weakened to LE7.20 (from LE7.10 a few days earlier, according to Reuters) reflecting Egypt’s volatile economic and political situation.

The pound actually fell as low as around LE8 per dollar at one point earlier this year on the black market, prompting the central bank to turn to a few different measures to reduce pressure on the currency and revive the economy:

  • It put the currency up for sale a few times in December 2012 to prevent a currency crisis and let the pound lose more than 11% of its value on the official market
  • It cut interest rates for the first time since 2009 to revive economic growth
  • The government accepted $12 billion of Gulf aid from Saudi Arabia, Kuwait and Abu Dhabi. $5 billion of that has already arrived.

But none of that is working. This graph puts the currency’s performance in context, showing how the pound has rapidly fallen in value this year:


And as the pound depreciates further, the more foreign currency reserves are drained and the less the central bank can support the official rate for the currency. This is why the country is spending foreign currency at a rate of about $1.5 billion a month.

Add to that, the few foreign investors left are moving to withdrawals but currency controls are making it difficult to convert Egyptian pounds to dollars. Earlier this month, Emad Mostaque, a strategist at Noah Capital Markets in London told me around half a billion dollars worth of investment is trying to leave Egypt at the moment. 

So the picture isn’t as rosy as the interim government may want you to think.

In fact, the volatility we see on Egypt’s currency cycle will be another black mark to add to the nation’s problematic currency history, marked by the Central Bank’s repeated efforts to keep the pound’s value elevated, sometimes at the expense of the country’s precious foreign reserves.

The people at Dcode, an Egyptian business consultancy, put together a comprehensive graph detailing just how volatile the Egyptian pound has fared in the last three decades:

[caption id="attachment_1907" align="aligncenter" width="650"]Dcode Dcode[/caption]

As long as the central bank and government refuse to accept that massive political turmoil and violence on the streets alarmed investors and traders, the pound will continue to fall, foreign reserves will bleed faster and the Gulf will have even more power over Cairo as it comes to the rescue once more with billions of cash. 

Egypt’s Biggest Oil Debts

Egypt’s state oil company, the Egyptian General Petroleum Corporation, is in big trouble. 

It has racked up billions of dollars of debt in the last decade with some estimating its dues to banks and oil companies is as high as $20 billion.

The magnitude of EGPC’s debts is such that it would be rare to find an oil company in Egypt which is not owed money.  The growing debt pile highlights the government’s struggle to meet its rising energy bills while trying to keep subsidised prices to avoid public unrest.

This Reuters story describes the problem in a nutshell:

Egypt has been delaying payments to firms producing oil and gas on its territory as it has struggled with dwindling currency reserves, rising food bills and sliding tourism revenues since the 2011 revolution that overthrew Hosni Mubarak.

Most oil firms hope to recoup the debts in full, but they acknowledge it could take years. While they are still planning to invest in new projects in Egypt that will help it avoid an energy meltdown, the debt situation remains a challenge.

The government’s delay in paying its debts to oil and gas producers could hold back investment in the sector and potentially endanger Egypt’s energy security.

But exactly how many companies have been impacted and what kind of money are we really talking about?

The following spreadsheet, acquired by Rebel Economy from an investment bank which has major interests in Egypt’s energy, lists the debts owed to no less than 42 companies for oil and gas exploration.

The spreadsheet shows that while a number of small companies are owed money, several large energy companies have achieved special repayment deals with the government.

Of the companies listed, Italy’s ENI agreed to allow EGPC to delay on a $100 million payment, the UK’s BP agreed to defer $600 million, and BG Group also of the UK, $589.8 million.

The spreadsheet ends January 2012, but it one of the clearest barometers of the scale of EGPC’s debt to oil companies that has been made public. Even this document is seen as portraying a conservative total debt figure of only $3.44 billion when actual debts to oil firms are estimated to be at least $5 billion.

If you want to look at this in more detail, click here.

Yet this is just the tip of the iceberg.

EGPC’s debts to banks, to countries that are lending the country fuel at sometimes preferential rates, and even debts to other ministries (the finance ministry has injected billions of dollars to the electricity ministry) set a frightening precedent for what Egypt is facing today.

With Egypt’s inefficient and costly energy subsidy system at the core, this is yet another example of why the country must take long-term steps to reform the system or be forever in debt to others. 

Why Offshore Matters

Guest post by Bradley Hope, The National newspaper’s Cairo bureau chief.

Phrases like “nominee shareholders” and “chains of offshore companies” are enough to make most people’s eyes glaze over. But that is on purpose.

Much like the financial wizards who created complicated financial instruments to conceal the risky bets they were making before the financial crisis, the lawyers and accountants behind offshore banking want their world to become low-profile and unimportant when the truth is quite the opposite. 

Half of all global trade passes through offshore tax havens, as this video below explains in what is a good primer for those unfamiliar with the topic:

But why do these tax havens matter?

A telling glimpse into why businessmen and women are so keen on keeping their secrecy came in April with “Offshore Leaks”, a huge investigative journalism project involving dozens of reporters around the world that showed how the high and mighty use offshore banking to conceal assets, evade taxes and pay bribes.

The leaks have shaken the foundations of a financial edifice that is believed to hold as much as $32 trillion.

So far, the elites of the Middle East have been saved of any exposure.

But that may soon change because journalists are still digging through the 2.5 million secret records obtained by the International Consortium of Investigative Journalists from a whistleblower.

The authoritarian regimes of the Middle East have long understood the power of offshore banking. Without the mechanisms provided by offshore banking, the countries of the Arab Spring would have been sitting ducks and vulnerable to exposure, long before they were hit by political change.

That’s why post-Arab Spring countries are struggling to recover assets they believe to have been the product of corruption: bribes, kickbacks and outright thefts.

For example, when Egypt’s Illicit Gains Authority – one of the main groups investigating corruption cases against the Mubarak regime and cronies – checked the bank accounts of Hussein Salem, a major tycoon, they found 45,379 Egyptian pounds, US$4,091, 18,730 Euros, 4,170 Saudi Riyals, 370 Swiss Francs and 30 British pounds.

In all that amounted to about $37,444.36 in cash. They also found properties, jewels and other valuables, but nothing close to his real estimated wealth of more than a billion dollars.

Salem, like many of Egypt’s political and business elite, did not keep his money in Egypt because it wouldn’t be safe from scrutiny.

Instead, he held bank accounts in Switzerland, Paris, Abu Dhabi and Hong Kong. He owns companies in the British Virgin Islands, Guernsey and Panama.

Likewise, Ahmed Ezz, the steel tycoon and former National Democratic Party bigwig, held accounts in Liechtenstein. Authorities there told Egyptian investigators that money funnelled into the country from Cairo promptly disappeared into a web of other companies, many of them believed to be used by Ezz to buy property in London.

Gamal and Alaa Mubarak, sons of the former president, hold more than $300 million in a joint bank account in Switzerland. They also owned a Cypriot company that they used for investments.

But in all of these cases, it is physically impossible for the average person to trace the assets and beyond the capabilities of many countries.

Remember when the protesters in Tahrir were chanting about Mubarak’s $70 billion? Egyptian investigators have only found two assets in Mubarak’s name: a villa in Sharm el Sheikh and another on the North Coast. In total, Egypt has not found more than $1 billion of assets belonging to members of the old regime around the world.

Even if it did find assets, it would have the challenge of proving they originated from corruption. That may be impossible without years of exhaustive inquiries, following each transaction from each offshore company to the next.

The Phillipines is still trying to figure out where the Marcos family stashed all their money (on cases that began in the late 1980s).

This explains why the government of Mohammed Morsi is trying reconciliation negotiations, allowing those accused of corruption to turn over some assets in exchange for cases against them to be dropped. But that is a bad idea for another reason: it only perpetuates a system where those accused of corruption can buy their way out of legal cases.

None of this even begins to touch on an even bigger problem: tax evasion. Offshore banking has helped created a situation where economic growth does not filter down to people in developing countries. Even as countries get richer, the elite use offshore accounts and companies to avoid paying taxes.

[caption id="attachment_1687" align="aligncenter" width="640"]Locations of Offshore Tax Jurisdictions, Grant Thornton Locations of Offshore Tax Jurisdictions, Grant Thornton[/caption]

Egypt estimates it is missing about 66 billion Egyptian pounds from tax revenues – enough to fund gas cylinder subsidies for a year and $1 billion worth of wheat. 

Libya and Tunisia are also grappling with similar problems. And should the government of Bashar Al Assad fall in Syria, the next government, too, will struggle to find the family’s assets.

Here’s hoping that the crack forming in offshore banking rips all the way across. The world needs to fast put an end to an era where bankers and multi-national companies, mafia dons and kleptocrats can build up secret fortunes with no accountability.

Will Egypt Restructure its Debt?

Yesterday, much to the surprise of investors and bankers, Egypt’s ministry of finance said it was considering restructuring its local and foreign debts to reduce pressure on the general state budget, according to Zawya.

Egypt’s total debt, according to Zawya figures, stands at EGP1.29 trillion or around $185 billion, yet there were few details provided on how this restructuring could play out.

According to the finance minister, Fayyad Abdel Moneim:

“We are considering loans from the Central Bank of Egypt (CBE) at the announced rate, instead of resorting to the Treasury bill [T-bill] mechanism at 13%, which will ultimately alleviate the general debt. This would also restrict monetary printing operations, which could result in the exacerbation of inflation”. 

The term ‘restructuring’ always implies default, or imminent default, so the fact the minister of finance has gone on the record with a statement that the country is considering this move is worrying, especially considering the big question today is whether Egypt will collapse or not.

But perhaps the terminology used is just wrong.

Let’s give Mr Abdel Moneim the benefit of the doubt. Perhaps he actually meant “refinance”, which means replacing old debt with new debt and using the proceeds from the new debt to pay off the old debt’s principal (restructuring is more drastic, and normally leads to a reorganisation of capital structure by exchanging current debt for other types of securities, waiving defaults, raising capital by selling assets and perhaps even…..going through bankruptcy!).

This means, according to his statement, Egypt’s government would borrow from the Central Bank at the cheaper interbank rate of around 10%, rather than sell government securities to banks, which would usually cost at least 13%.  This would be a welcome relief for Egypt, where debt service payments on bonds and bills it sells make up at least 20% of the budget – a huge weight alongside energy subsidies.

So what’s wrong with that?

The move is likely to jeopardise the independence of the Central Bank. Not only would it appear like the Central Bank is subsidising sovereign debt by offering cheaper rates to the government, but it creates governance issues because the Central Bank starts to function like the ministry of finance – taking funds from investors (in this case banks) to finance government spending.

In the worst case scenario, if the government needs more money (which is very likely considering its spending habits), it may prompt the CBE to raise reserve requirements (basically the amount of funds banks are asked to hold to make loans with).

This could ultimately compromise the position of the CBE, anger the banking community which has been supporting the government for the last two years through buying T-bills and bonds (albeit at a fairly high return), and further undermine the Morsi administration and its economic decisions.

That’s not to say Egypt is safe from default.

Egypt’s sovereign credit rating is very low at the moment and that means the risk of default is high. But, because most of the country’s debt is technically “domestic”, Egypt can roll-over repayments. It needs to print more money to do this, however, and that would cause serious inflation.

But whether Egypt is refinancing or restructuring, there is a fundamental flaw here that has left bankers puzzled: details are scarce and there are no plans being discussed openly.  Egypt’s ministries must streamline, work together and stop announcing random potential plans, that may or may not come into fruition.

This story even surprised members within the finance ministry itself.

Mr Abdel Moneim may be new to his job (he became finance minister just a few weeks ago), but it’s high time there was some coherence in one of the most important ministries in Egypt. 

Egypt’s Rising Hunger

Guest post by Isabel Esterman, a Cairo-based journalist. She blogs here

An estimated 13.7 million Egyptians are too poor to provide their families with safe and nutritious food, a new report from the UN World Food Program (WFP) reveals.

But what is more alarming is that Egypt’s food problem is not related to supply, the WFP says, but financial access to food.

“There is not a problem of food availability,” said GianPietro Bordignon, the WFP’s Egypt country director. “The problem is financial access to food.”

A series of economic shocks—including the 2006 bird flu outbreak, the global financial crisis and Egypt’s economic decline post-revolution —have left around 17.2% of the population unable to buy sufficient food for their household, according to the report produced by the UN in conjunction with Egypt’s government-statistics agency, CAPMAS.

In fact, access to nutritious food will only get worse as more Egyptians fall below the poverty line.

Between 2009 and 2011, 15.2% of Egyptians fell into poverty, while just 7.7% were able to move above the poverty line. An additional 12.6% of the population remained in chronic poverty.


Unsurprisingly, rising food prices and inflation are the biggest culprit for struggling families, especially for the poorest households who in 2011 spent 51% of their total expenditure on food (compared to a national average of 40.6%), according to the report.

As grim as these figures are, more recent data shows that the current situation is even worse.

The latest issue of the Egyptian Food Observatory reveals that a staggering 88.9% of Egypt’s vulnerable households don’t have enough money to meet their basic needs and have tried to cope by buying cheaper and less food.

This is a substantial deterioration from even a few months ago.

Instead of eating nutritious fresh foods, families fill their bellies with cheap, calorie-dense, nutrient-poor foods—especially subsidised bread, sugar and oil, paired with cheap legumes like fava beans. This is exacerbated by the country’s food subsidy system, which helps to cushion the poor against price spikes in key commodities like wheat, but is not designed to provide a balanced diet.

“If you eat bread, ful and tameyya as your staples, you will lack those essential nutrients that make a difference in early life,” said GianPietro Bordignon of the WFP.


Indeed, the most distressing finding of the new WFP is that just over half of children under five were anemic, based on tests in nine provinces. Nationwide, an estimated 31% of Egypt’s children suffered from stunted growth in 2011, up from 23% in 2005.

This is tragic for these children, and for the country as a whole.

Children who do not receive adequate nutrition in the first five years of life are limited from realising their full physical and cognitive potential, having a huge bearing on their own future prospects and that of the entire society and economy.

So what can be done?

Well, Rebel Economy has said it often enough, and so has everyone else: reform the subsidy system.

One of the key recommendations of the WFP report is to streamline and better target the subsidy system. Cash transfers offer economic savings, but surveys show that poor households overwhelmingly prefer in-kind assistance, fearing price inflation and poor market access.

In addition to bread, which is available regardless of economic status, 73% of families who are not poor have access to food ration cards, while 19% of poor families are excluded from the program. Prioritising needy families would let the government offer more nutritious food to those who need it without any extra strain on the budget.

Steps should also be taken to reduce waste and leakage, which is estimated at around 30% in the balady bread programme, and above 40% for fresh fruits and vegetables.

Enriching foods with micronutrients like Iron and Vitamin A (which is already done for subsidised bread and oil) is an imperfect solution, but with very little cost it can provide these nutrients to people who would not otherwise be consuming them.

In the long term, the Egyptian government needs to rethink the way it spends money if it wants to break the cycle of poverty and malnutrition.

Above all, good health and high productivity depend not just on nutritious food, but also on lifelong access to quality healthcare, education and sanitation. This is a mammoth, but inevitable task for Egypt and its government, and the least it owes for the next generation.

Will Egypt Collapse?

Middle East economists and analysts have tried and often failed to answer Egypt’s million dollar question: Will the country’s economy collapse and, if so, when?

Finally, someone has crunched the numbers to give us an answer.

London-based economist Ziad Daoud pored over Central Bank data and reckons the scare-mongering (of which the media is to blame of course…) of Egypt’s imminent economic collapse is largely unwarranted.

Egypt needs to raise $11.7 billion in the next 12 months, according to International Monetary Fund estimates.

The task seems “formidable,” Daoud writes in his blog post, “especially without the help of the central bank’s foreign currency reserves which are near their minimum safety level.” Read More

Why Egypt Can’t Rely On Sukuk

A law that better regulates sukuk issuance has been mooted for several years, but the move to enforce a clear law became a priority after the revolution, especially considering the economic climate is increasingly being shaped by Islamic political parties.

So finally the “troubled passage for a bill” ends, Reuters reports and Egypt’s President Mohamed Morsi has approved a law allowing the state to issue Islamic bonds, or sukuk.  Here’s the full bill in Arabic.

There are high hopes for sukuk to shore up Egypt’s flagging finances.  Officials have thrown out figures to the public that signal these instruments could raise as much as $15 billion from domestic and foreign investors.

Well, I’m sorry to burst your bubble Mr President, but that’s not happening. Read More

السندات الحكومية: الجزء الثاني

هذا هو الجزء الثاني من سلسة ممتازة مكونة من جزئين من إعداد إيزابيل إسترمان وترجمة ريم مكين، تدور حول السندات الحكومية: أذون الخزينة وأدوات الدين الأخرى المباعة من قبل الحكومة (بما في ذلك الحكومة المصرية) لتسديد قروضها. الجزء الأول هنا.

هذه المرة ننظر إلى تأثير الإعتماد على السندات الحكومية لتغطية إحتياجات الإقتراض.

لا يوجد شك في أن إقتصاد مصر يعاني، لكن إذا انتبهت لإصدار السندات ونتائجها، فستجد أن الحلقة المفرغة من الدين مستمرة. طالما أن دين مصر ينمو أسرع من إقتصادها، فستصبح الأمور سيئة.

تحتاج مصر إلى تنظيم حساباتها عن طريق خفض الإنفاق (إعادة توزيع الطاقة والدعم على الطعام هي الأشياء الأولى البدء بها) ورفع العوائد (زيادة الضرائب، وإدخال التمويلات العسكرية والوزارية داخل الخزينة إن أمكن).  إذا لم يتم ذلك بطريقة صحيحة، فمن الصعب تجنب الإضرار بالضعيف أو إغضاب القوي، ومن الصعب رؤية كيف تمتلك الإدارة الحالية القدرة السياسية للقيام بذلك.


INFOGRAPHIC: Egypt’s Bond Addiction

This is PART 2 of an excellent two-part series by Isabel Esterman on government securities: treasury bonds and bills, and other debt instruments sold by a government (including Egypt) to finance its borrowings. Here is Part 1

This time we’re looking at the impact of relying on these financial instruments to cover borrowing needs.

We all know that Egypt is in really bad shape, but if you start paying attention to bond issuances and yields, you can watch (in horror) as this vicious circle of debt continues. As long as Egypt’s debt grows much faster than its economy, things are going to be rough.

As to how to solve this, one possible route is for Egypt to get its accounts in order, by cutting spending (restructuring energy and food subsidies is the obvious place to start) and raising revenues (increasing taxes, and possibly bringing military and ministerial funds into the treasury). Unless this is done very well, though, it’s hard to avoid hurting the vulnerable or angering the powerful, and it’s difficult to see how the current administration has the political capital to do either.

In theory, Egypt could also come up with a comprehensive stimulus plan, and convince lenders (domestic and foreign), that a big enough infusion of cash will get Egypt’s economy back in gear without the need to resort to austerity measures. For this to work, it would have to be a whole lot more detailed and credible than what we’re seeing come out of either the ruling party or the opposition.

Disclaimer: In the course of the research for this graphic, it was discovered that the proportion of government spending on debt servicing (to cover the repayment of interest and principal on a debt) was actually much larger than the figure  extensively used in the media. It stood at 35.7% rather than the “25%” often quoted in mainstream media.

We have consulted bankers and financial analysts to confirm this, but there is still controversy over  how it the figure should be calculated. It is a matter of terminology, so for number geeks out there, we have chosen to look at entries (sources below) for “interest” and “loan repayment” as a percentage of total budget outlay, rather than “interest” as a percentage of “expenditures”, which yields the more widely-cited figure of 25%.

infographicPart2Figures come from the following sources:

Public Debt/GDP

Budget allocation

Debt service payments