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.