Egypt company borrowing drops amid transition

Egyptian companies are delaying expansion plans, driving debt levels to the lowest in almost two years and dimming prospects for the Arab country’s economic recovery as it struggles with a transition to democracy.

The debt-to-equity ratio - a measure of debt as a percentage of shareholder equity - of companies listed on the benchmark EGX 30 Index dropped to 51 per cent this month, near the lowest level since January 2010 and the second-lowest in the Middle East after Lebanon. It compares with 126 per cent for companies on Morocco’s Madex Free Float Index and 62 per cent for those on Saudi Arabia’s Tadawul All Share index.

Violence has flared several times since military rulers took over power from former President Hosni Mubarak in February. The unrest of the past eight months has hurt the economy, with gross domestic product growing 0.4 per cent in the quarter through June after contracting 4.2 per cent in the first three months of the year. Investors say the insecurity has been compounded by delays to elections, now due to start in late November, and a lack of clarity on commercial regulations.

“Changing the rules after Mubarak is not an overnight process, but we thought when this started that by now we’d be getting back to business,” Arthur Byrnes, who helps manage $800 million as chairman of New York-based Deltec Asset Management Corp, said by telephone October 13. The firm’s investments include Egyptian stocks.

“The rules are still unclear and companies with positive cash flows are reducing their debt and waiting for what the rules are going to be,” said Byrnes. “The longer this continues, the more impatient investors are going to get.”

Total debt issuance and syndicated loans drawn by all Egyptian companies, including those not publicly traded, fell 65 per cent this year from a year ago to $5.59 billion, according to Bloomberg data. Higher government yields spurred local banks to focus on lending to the state, increasing their holdings of the debt by about 50 per cent in the first half of the year.

Palm Hills Developments SAE, the Cairo-based luxury property developer, is among companies that have canceled projects this year. The company last month returned a 190-feddan (197 acres) plot of land on the outskirts of the capital to the government. Lecico Egypt SAE, a sanitary ware and tiles manufacturer, said in July it will delay the first phase of a porcelain manufacturing project.

The nation’s government borrowing costs have risen to the highest level in almost three years, with the yield on one-year treasury bills soaring 344 basis points since the start of the revolution to 13.88 percent last month. The rate was at 13.72 per cent at an auction October 13. The yield on Egypt’s 5.75 per cent 10-year dollar bond due 2020 has climbed 50 basis points to 5.86 per cent from its post-revolution low on September 21.

The cost of protecting Egyptian government debt against default for five years surged 264 basis points this year to 506 last month, according to data provider CMA, which is owned by CME Group Inc and compiles prices quoted by dealers in the privately negotiated market. That rate was at 440 on Monday.

Total lending by Egyptian banks increased 3.8 per cent to 47.3 billion pounds in the first seven months of the year, according to central bank data. That includes a 3.6 per cent advance in lending to non-governmental entities to 43.2bn pounds, the data show.

Higher government borrowing costs, driven by the sell-off of $34.9bn in government securities by foreign investors in the first six months of the year, may make funding more expensive even for local companies in good financial health, said Wael Ziada, head of research at Cairo-based EFG-Hermes Holding SAE, the biggest publicly traded Arab investment bank.

“Companies with large domestic exposure can expect to face higher costs for funds because of the local currency outlook and political risks, which will take time to recede,” Ziada said.

The Egyptian pound has lost 2.8 per cent against the dollar this year to 5.9713 on Monday. The central bank’s foreign currency reserves have shrunk by a third in 2011 to $24 billion. Twelve-month non-deliverable forwards for the pound are at 6.68 per dollar, reflecting an expectation for the currency to weaken about 11 per cent over the life of the contracts.

Companies listed on the Egyptian exchange haven’t issued bonds this year compared with sales of $748.5 million last year, according to data compiled by Bloomberg. Orascom Construction Industries, the country’s biggest publicly traded builder, was 2010’s top issuer with a $292m sale.

Chances for the return of credit growth will improve if parliamentary and presidential elections are held peacefully, said Moustafa Assal, head of fixed-income at Cairo-based investment bank Beltone Financial Holding.

“Companies are now focused on keeping consistent business, so it’s understandable why they are not borrowing,” Assal said. “If elections are conducted well, we will see a rebound. It doesn’t matter if Islamists gain more power; investors want to see a civilian government.”

Egypt’s EGX 30 Index, the world’s fifth-worst performer this year with a 42 per cent decline, has seen the price-to-book value of its shares fall to 1.17, the lowest level since Bloomberg started keeping track in 2004. It compares with 3.01 in Morocco and 1.8 in Saudi Arabia.

Stock valuations are “reasonable,” and some companies are “very sound fundamentally,” said Deltec’s Byrnes. “But confidence has been wounded and restoring it takes time. The government says it’s doing its best, but people see the demonstrations and the headlines and pictures of women weeping on coffins and they can’t help but grow more skeptical.”