Egypt's local borrowing may backfire on economy

Egypt’s increased reliance on local lenders to finance its budget shortfall may stifle any economic recovery by reducing the incentive of banks to lend to companies. The Arab country’s local-currency borrowing costs have surged to the highest levels in almost three years as foreign investors dumped the debt following the uprising that ousted President Hosni Mubarak in February. The country’s interim government rejected international loans to fund this year’s budget deficit, leaving local banks to shoulder the burden.The government’s domestic borrowing is coming at “a very high cost and it chokes off resources that could be made available to the private sector,” said Magda Kandil, executive director and director of research at the Egyptian Centre for Economic Studies. Banks can “easily refrain from lending to the private sector and capitalise” on “attractive and less risky” government securities, she said. The yield on one-year treasury bills has soared 263 basis points, or 2.63 percentage points, since the last pre-revolt sale to 13.07 percent as Egypt redirected its bond sales to bills with maturities of one year or less to avoid paying higher interest in the long term. Loans were the equivalent of 50 percent of deposits at the commercial banks in June, down from 52 percent a year ago, according to central bank data. That compares with 93 percent in the United Arab Emirates as of May.Egypt’s economy contracted 4.2 percent in the quarter that ended in March amid the worst political crisis to hit the country in three decades. The budget deficit is expected to widen to 9.9 percent of gross domestic product this fiscal year from 9.5 percent a year ago, according to EFG-Hermes Holding SAE, the biggest publicly traded Arab investment Bank. The government said in June it’s targeting 8.6 percent. Higher borrowing costs may curtail lending to companies, potentially slowing economic growth by up to 1 percentage point in the next one to two years if they don’t retreat, said Jaap Meijer, the Dubai-based head of the bank team at AlembicHC. “Private-sector demand was actually growing at a healthy pace last year, but that’s no longer the case because of the uprising and possibly because of the increase in interest rates,” Meijer said. “Public banks appear to be more keen to lend to the government because these investments carry high yields and attract zero risk-weighting.” Foreign investors reduced their holdings of Egyptian T- bills by 34.9bn pounds ($5.9bn) in the first six- months of the year to 24.5bn pounds, according to central bank data. The country’s 39 private and public banks stepped in, increasing their investments by 46 percent and 56 percent, respectively. Bank of Alexandria, the Cairo-based unit of Italy’s Intesa Sanpaolo SpA, increased its holdings by 70 percent to 8.16bn pounds. Egypt turned down a $3bn International Monetary Fund loan in June. Samir Radwan, the then minister of finance, said the government would rely on sales of local-currency debt to finance 90 percent of its budget deficit, expected to reach 134bn pounds this fiscal year. Radwan has since been replaced by Hazem El Beblawi, who confirmed the government’s strategy in an e-mailed statement Sept 4.The government plans to sell securities this quarter ranging in maturity from three months to three years valued at 151.5bn pounds, the highest amount on record and a 12 percent increase from the same period last year. Reliance on local lenders “that’s taking place now will for sure put pressure on the liquidity of the banks and will affect the capability of the private sector to borrow,” said Hani Serie El-Din, former chairman of Egypt’s financial markets regulator, the Capital Markets Authority. “It’s quite a challenge. It will impact growth.” From / Arabian Business News