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Risks of an Egyptian default remain slim, says Standish’s Brendan Murphy

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Brendan Murphy, co-manager the BNY Mellon Global Strategic Bond Fund, gives the view of Standish –BNY Mellon’s specialist fixed income and credit investment management subsidiary – on the high profile issues afflicting Egypt and threatening other Middle Eastern countries.

“In recent weeks, the news headlines have been dominated by the heightened tensions across North Africa, with widespread displays of popular unrest in both Tunisia and Egypt,” says Murphy. “These two countries share several structural and institutional vulnerabilities; unemployment is high (especially among the young), food prices have increased significantly, and both are ruled by regimes which are not wholly democratic. This has provided fertile ground for discontent from liberals who view Western democracies as a model, and for conservative Islamists opposed to the influence of the West. More recently, a general frustration surrounding the lack of economic opportunity has also fuelled protests,” he adds.

The ratings agency Moody’s downgraded Egypt’s credit rating to Ba2 earlier this week, while Standard & Poor’s downgraded the country to BB yesterday. Meanwhile, Fitch continues to rate the country at BB+.

“Across the region, we have had very limited exposure to local currency-denominated bonds issued by Egypt, and no exposure to Tunisian debt. However, we believe that Egyptian bondholders are being suitably compensated for their risk, as we do not foresee a default scenario, although the unrest could continue for quite some time to come,” Murphy explains. “At present, there are no signs from the authorities that bond payments are, or would be, in jeopardy; given the potential impact on future borrowing of a default, this is a serious step for any government to take and is usually taken only as a very last resort,” he says.

“Across the region, we have had very limited exposure to US dollar-denominated bonds issued by Egypt, and no exposure to Tunisian debt. However, we believe that Egyptian bondholders are being suitably compensated for their risk, as we do not foresee a default scenario, although the unrest could continue for quite some time to come,” Murphy explains. “At present, there are no signs from the authorities that bond payments are, or would be, in jeopardy; given the potential impact on future borrowing of a default, this is a serious step for any government to take and is usually taken only as a very last resort,” he says.

“Clearly, there is a risk of contagion to other countries in the region, including the likes of Morocco. However, in Morocco’s case, we have been less concerned by the newsflow, given its relatively stable political situation.” Murphy continues, “This stability owes much to the popularity of its leader King Mohammed VI; he is viewed as a reformer and has championed a number of social improvements. He is also a so-called ‘commander of the faithful’, in other words, many Moroccan Muslims see him as their legitimate leader.”

“We believe it is unlikely that the unrest will spread to the Middle Eastern states such as Saudi Arabia, Qatar, the United Arab Emirates or Bahrain,” he says. “While these are all regimes with low levels of democracy and high youth unemployment, there is a significant difference in the standard of living of these countries compared with their North African neighbours. Indeed, the oil and gas revenues of these Middle Eastern states enable their governments to provide a financial cushion that is not available elsewhere. As such, government finances are comfortable given the current high oil prices. Meanwhile, they are investing heavily in sovereign wealth funds with the aim of providing greater diversification of wealth over the longer term. Nevertheless,” Murphy concludes, “vigilance remains key, and it will be important to closely monitor the situation as events unfold.”

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