Analysts debate conversion of gulf lifelines to bonds

Nada Badawi
6 Min Read
Interim president Adly Mansour (C) met with UAE National Security Chief Sheikh Hazza bin Zayed al-Nahyan (C-L) on 9 July 2013 in the Egyptian capital Cairo. (AFP File Photo)
 handout picture released by the Egyptian Presidency shows Egypt's interim president Adly Mansour (C) meets with UAE National Security Chief Sheikh Hazza bin Zayed al-Nahyan (C-L) on July 9, 2013 in the Egyptian capital Cairo. (AFP Photo)
handout picture released by the Egyptian Presidency shows Egypt’s interim president Adly Mansour (C) meets with UAE National Security Chief Sheikh Hazza bin Zayed al-Nahyan (C-L) on July 9, 2013 in the Egyptian capital Cairo.
(AFP Photo)

A recent claim made by a government-affiliated lawyer that Egypt could convert the recently pledged $12bn in Gulf lifelines into tradable bonds has ignited debate among financial analysts.

If Egypt decides to convert the packages into bonds, the Gulf will be given the option to sell the bonds to other investors, giving them extra protection in case Egypt defaults. However, this will reduce Egypt’s flexibility in using the aid as opposed to depositing the full amount at the Central Bank of Egypt.

Meanwhile, former finance minister Momtaz El Saeed said that a conversion is unlikely to yield any positive outcome if it is not allocated towards national projects.

“It really doesn’t matter if the government chooses to convert the grants into bonds or leave them as deposits at the central bank; this is a trivial matter to think of in the first place,” he said. “It is more important to determine how the financial assistance will be used to launch developmental projects and lessen the country’s widening budget deficit.”

Chairman of Arab Finance Osama Mourad however disagrees with El Saeed, recommending that the government convert the aid to bonds in lieu of depositing it at the central bank.

“The primary advantage of bonds is that there’s a timeframe set in place, let’s say five or 10 years, and the lender will be able to know when will the money be returned,” he explained.

The depository system on the other hand does not offer the same advantages, he said, which could result in the “misuse or misallocation of the aid.”

Although Mourad agrees with El Saeed on using the aid to invest projects in the country, he emphasised that it would not be used for other economic reasons.

“It is imperative to not use this money to lessen the country’s budget deficit or raise salaries or government incentives,” he said. “The budget deficit problem will not be solved through Gulf aid, because it is temporary assistance.”

Egypt’s budget deficit hit EGP 205bn in June, representing 11.8% of the country’s GDP in the fiscal year 2012/13, reported the finance ministry in June.

Egypt has already converted Qatar’s $3.5bn loans into bonds through a newly established $12bn Euro Medium-Term Note programme. However, it is not yet known whether the aid of the other Gulf nations will be dealt with similarly.

Last week, Saudi Arabia and the United Arab Emirates (UAE) pledged a total of $8bn in aid; Saudi’s aid will be divided to $1bn cash, $2bn for petroleum products and another $2bn deposit. The UAE will contribute a $1bn grant and $2bn interest-free deposit with the central bank. The aid was pledged after the military deposed former president Mohamed Morsi following massive nationwide protests.

According to a report published by MubasherTrade, the Gulf aid should alleviate economic burdens off of the prospective government, especially the energy crisis, due to the UAE’s contribution of gasoline and diesel shipments.

“This should provide a  cushion to  the Egyptian economy, covering an increasing budget deficit and falling foreign reserves, in case the International Monetary Fund loan is not  secured  in  the  short-term,” the report stated, taking into consideration political stability.

A day after the lenders’ aid announcements, Kuwait also pledged an aid package of $4bn to support Egypt’s troubled economy. According to Kuwait’s official news agency, KUNA, $2bn of the package will be in the form of deposit to the central bank, while $1bn will be offered as a non-refundable grant. The Gulf state will also provide cash-strapped Egypt with fuel and petroleum products worth $1bn, KUNA’s report said.

Bank of America Merrill Lynch Global Research said in a report issued recently that the financial support is likely to keep the Egyptian pound’s value stable in the near term.

The Egyptian pound has lost over 15% of its value against the dollar during Morsi’s one year in office, contributing to a 9.75% rise in the annual inflation rate in June, compared from 8.2% in May.

The report also added that the appointment of interim prime minister Hazem El-Beblawi is “likely to look positively upon negotiating with the IMF and is believed to have opposed an EGP devaluation within official circles”.

El-Beblawi agreed on 9 July to take over the government from former prime minister Hesham Qandil, who lost power when Morsi was deposed by the military.

The institution published in a different report few days ago that the aid “will alleviate the concerns about the external position and the transition, in our view,” adding “we suggested Egypt need roughly $8bn to keep foreign international (FX) reserves stable over the next 18 months.”

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