The Development of Bond Market In Egypt
Richard Roll
Yasser Hassan
Page 1 of 35
Abstract
Most developed countries have well-developed bond markets, with some
emerging economies making significant progress in this regard. In Egypt however,
the bond market sector needs further development. The purpose this paper is to
examine the structure of the bond market in Egypt and compare it to bond markets in
other countries. The objective is to identify its weaknesses and recommend measures
to enchance its role in the economy. While the objectives of monetary and fiscal
policies differ, both require treasury bonds as an important instrument. Central banks
use treasury bonds to conduct open market operations for the management of liquidity
and interest rates in the system. The Ministry of finance relies upon bonds to finance
the country’s medium and long term needs and reduce the cost of public debt. In
addition to being policy tools, government bonds serve other general market purposes.
They are important for indicating the risk free rate in the country and serve as
benchmarks in pricing corporate debt. From a portfolio management point of view,
they represent an important asset class and allow money managers to balance clients
portfolios and hedge risks.
By surveying data from countries that include emerging markets, Islamic
states, and developed nations, this paper attempts to determine how the Egyptian bond
market measures. Obviously, there are differences among countries that may slow the
development of one compared to another and that factors exist in one country that may
not be important in another. As far as Egypt, there is no doubt that plausible steps
have been undertaken in developing its capital market in the past decade; however,
and contrary to most other markets, the equity market developed at a much faster rate
than the bond market which still lags behind other markets of similar economic
conditions. Egypt still needs to speed the development of its bond market which, in
turn, will help in the economic development of the country. The paper proposes that
government efforts should concentrate in developing the government bond market as
well as the markets of the future and let the corporate bond market follow in its
footsteps. The main issues in developing the government bond markets are liquidity,
diversity, and pricing. Diversity could be easily achieved through the issuance of
bonds with varying maturities (from the 91 days treasury bills to a 30 years
government bond.) Liquidity in the primary market could be improved through the use
of a Primary Dealers System while in the secondary market, there is a need for a fairly
large number of secondary dealers. It is also strongly recommended that pricing of the
government bonds be done through auctions to ensure a market driven rate. In order
to increase awareness among market professionals, it is recommend that the current
efforts done by the CMA and the Stock Exchange in education/training programs be
expanded and sponsored to reach as many professionals as possible. On top of the
markets of the future that deserves close attention is the Mortgage Backed Securities
market. Priority should be given to pass the mortgage law first which then will create
a whole new market. In addition, the government also needs to do some work on the
legal front regarding issues that might hamper the development of the corporate
bonds market. A major issue is developing a law dealing with bankruptcy and
companies in distress; a new regulation speeding up the process and finding a balance
between the company's interest and the investors' interest should be drafted and
discussed. Further, the report recommends a reconsideration of the regulations
prohibiting any non-investment grade corporate from issuing bonds.
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I. Introduction
This report examines the bond market in Egypt and compares it to bond markets in
other countries. The objective is to identify weaknesses and recommend measures to
enhance the bond market’s role in the economy. Most developed countries have welldeveloped bond markets and many emerging economies have made significant
progress in this regard. Currently in Egypt, banks dominate the loan market, so a
more active bond market would provide an additional element of competition.
Securities markets are capable of pricing and managing risks as effectively as banks.
Also, they can distribute financial risk more widely and efficiently, which means that
there will be a smaller concentration of risk and less potential for loss in the banking
system with a well functioning securities market in the country. Diversification not
only helps the banking community manage its assets and liabilities more efficiently,
but also provides the corporate community with a range of financial instruments with
different tenors and features. This enables corporations to add value for their
shareholders through cost savings and by hedging financial risks. In addition, a
developed corporate bond market supports the economy in meeting its financing needs
during periods of rapid economic growth. Securitization of mortgage loans, leasing
contracts, and consumer finance facilities can only be done if the bond market is ready
to meet the demands of those market segments.
The Egyptian government bond market could be developed even farther. While the
objectives of monetary and fiscal policies differ, both require treasury bonds as a key
policy instrument. Central banks use treasury bonds to conduct open market
operations for the management of liquidity and interest rates. The ministry of finance
relies upon bonds to finance the country’s medium and long term needs and to reduce
the cost of public debt. In addition to being policy tools, government bonds serve
other general market purposes. They are important for indicating the risk free rate in
the country and serve as benchmarks in pricing corporate debt. From a portfolio
management point of view, they represent an important asset class and allow money
managers to balance client portfolios and hedge risks.
Using data from countries that include emerging markets, Islamic states, and
developed nations, this paper undertakes a comparative assessment of the Egyptian
bond market. There are, of course, many differences among countries that may slow
the development of one as compared to another and factors that loom large in some
countries may not be important in others. Policies that could foster further
development of the Egyptian bond market will be identified and specific changes will
be recommended.
The paper is organized as follows: section one provides an overview of the current
Egyptian bond market and discusses major macroeconomic influences. It also surveys
historical and cultural perspectives in Egypt. Section two compares Egypt with other
countries. Section three examines the current Egyptian government bond market, the
possibly conflicting objectives of different parties, and various actions currently being
undertaken for its expansion. Section four discusses the corporate bond market,
summarizes features of outstanding bonds, and outlines factors believed to hinder its
growth. Section five mentions the taxation of securities and its effect on yields.
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Section six discusses the future of the bond market in light of the expected
introduction of the mortgage law, factoring, and securitization. Section seven
provides some concluding remarks.
I. A. Bond Trading Activity
Activity in the bond market has been low despite the steady rise in values of Bonds
over the past few years. As can be seen from the graph below, 1999 witnessed a high
growth rate in bond trading with volume and 2000 showed a further acceleration with
volume jumping from LE 700 million in 1999 to more than LE 2 billion in the first 11
months in 2000.
The year 2000 brought good news for bond traders; First the value of treasuries traded
edged up to about LE 2.29 billions. The biggest increase in 2000 came from corporate
bonds where the value of trading witnessed a huge increase to LE 2.34 billion, 6.7
times the previous high in 1998.
Trading Volume
5,000.0
LE Millions
4,000.0
3,000.0
2,000.0
1,000.0
1994
1995
1996
Treasury Bonds
1997
1998
1999
2000
Corporate Bonds
Source: Capital Market Authority
While trading volume in bonds has grown impressively over the past 6 years, the
Egyptian capital market remains dominated by stocks. See the pie chart below.
Bonds as a group accounted only for 11% of total trading volume on the Capital
market in 2000 (through November 27, 2000) even though 2000 was the most active
year ever for bonds and witnessed the largest share of bondtrading volume.
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Breakdown of Trading Values in 2000
Treasury Bonds
5.5%
Corporate Bonds
5.6%
Stocks
88.9%
Source: Capital Market Authority
I. B. Yields and Yield spreads
There is a number of macro economic factors affecting the yields and yield spreads in
the Egyptian market. The current yield-to-maturity (YTM) for treasury issues averages
about 12%, while for corporate issues the YTM averages about 13.5%. Some factors
contributing to these high interest rates are discussed hereafter.
The Balance of Payments Situation & Exchange Rates
The balance of payments deficit represents one of Egypt’s major problems.The current
account balance went down from a surplus in fiscal year 1997 to a deficit of $2.5
billion in 1998 and $1.7 billion in 1999. This deterioration was caused by fall in
revenues from tourism after a terrorist attack in 1997, declining oil prices, and an
increase in imports. Tourism revenues started to recover in 1999 and 2000, but the
benefit from increases in oil prices are declining because the net oil proceeds are
small.
Despite improvement in the current account, the balance of payments has remained
under pressure because of a sharp deterioration in the capital account from $3.4 billion
in 1998 to $0.9 billion in 1999 and a negative $0.9 billion during the first half of 2000
(please refer to appendix I).
As a result, Egypt has been loosing foreign currency reserves, bringing them down to
some $14 billion from over $20 billion in September 1998. Reserves are still large
relative to imports (about 9 months of imports), reserves-to-short-term debt (0.115),
and reserves-to M2 is comfortable (21% as of end of January 2000) although
declining.
This situation has caused a foreign currency shortage in the market and a perception
among the public that a devaluation is expected. The monetary authorities have
allowed the exchange rate to slide by some 10% during September and October 2000
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and have kept interest rates from declining by tightening the money supply to support
the local currency. As long as Egypt’s balance of payment continues to show a
deficit, the devaluation risk depress bond prices and drive up yields.
Inflation and Interest rates
Controlling inflation is the main objective of Egypt’s monetary policy, which has been
successful. Average inflation was 3.8% in fiscal years 1998 and 1999. Monthly
inflation figures show increases in 2000 including a 3% rate just in February 2000.
Short term interest rates (3-months deposits) increased from 9.1% at the end of May
1999 to 9.4% at end of February 2000. Overnight interbank rates increased from
11.9% to 15.5% during the same period but declined to 14% by the end of March
2000.
I. C. Historical and Cultural Perspectives
The Nasser Era
The Egyptian Bond market can be separated into two eras; the first extends from the
Nasser era until 1992 when the new capital markets law #95 was introduced. The
second era extends from 1992 to the present.
Before 1992, there were only three types of bonds traded in the Egyptian market:
1Housing Bonds
2Treasury Bonds
3National Development Bonds (in US Dollars)
All these bonds were issued by the government to act as tools of monetary policy.
Dealings in the stock exchange sharply decreased after the nationalization of Suez
Canal, the imposition of a ceiling on dividends payable by private companies, and the
nationalization laws of 1957. All companies operating in Egypt were nationalized by
the July 1961 communism.
These factors, along with a non-regulated stock exchange,discouraged the issuance
and trading of financial paper. The result was an inactive bond market.
A Legal Interest Rate Cap
Treasury Bills were the only actively traded debt instruments available in the Egyptian
market until mid 1990s. This was a result of a legal cap on interest rates which
prohibited corporations from issuing bonds at a yield higher than 7%. Investors
preferred to place their funds in banks at a rate higher than 7% with the bank’s risk
rather than placing them in bonds with a company’s risk, which is definitely higher
than a bank’s risk. Development of the corporate bond market began with raising the
ceiling on the coupon rate. This was introduced by the capital markets law of 1992.
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The Capital Markets Law #95 for 1992
Keeping in mind that a strong and efficient capital market is the base for private sector
economic growth, the Egyptian Government has undertaken several measures to
develop its securities exchange. An important element was law #95 for 1992 (the
Capital Markets Law) whose core provisions included the following:
1- Foreign ownership of securities is no longer prohibited. This led to a considerable
inflow of foreign funds into the Egyptian economy and helped boost the stock
exchange index.
2- Tax Exemptions on capital gains and dividend yield encouraged investors to put
their money in the stock exchange rather than banks.
3- Arbitration as a prompt way of resolving legal disputes.
4- Emphasis on the role of specialized capital market service companies like
brokerages, mutual funds, portfolio managers, underwriting institutions and
venture capital companies.
5- Bolstering the CMA,allowing it to take measures to control the market and boost
investor confidence.
A major and significant requirement necessary for the development of the bond
market was introduced recently. The CMA required all companies intending to issue
bonds to obtain a rating. This measure was taken to safeguard to small investors who
do not have the ability to assess the credit risk of a company and to guarantee that the
issuing company has the capability of paying its coupons and principal as they fall
due.
The Role of Shari’a for investors and borrowers
Islamic Shari’a prohibits usury, which was defined by some as lending or borrowing
money at a fixed interest rate.Thus, a large number of influential clerics encourage the
faithful to eschew lending or borrowing at predetermined interest rates whether with
banks or by using other fixed income instruments. Islamic banks and Islamic banking
instruments were developed to overcome this problem. However, a significant
numbers of Shari’a people have concluded that current bank transactions are not
considered the type of usury prohibited by Islam based on the fact that there is no
exploitation involved. On the contrary there are benefits to all parties involved.
Therefore, this group allows dealing in interest. The vast majority of the Egyptian
public tends to follow the more lenient view.
This is revealed by the fact that customers’ deposits with Islamic banks in Egypt were
only about 5.2% of all deposits in the banking system at the end of 1999. The same
applies to the loans and advances. Consequently, it is clear that Shari’a laws are not
the main inhibitors of bond market development in Egypt.
Education & General Knowledge
Page 7 of 35
The stock exchange was severely affected by the nationalization laws of the Nasser
era. Listed companies sharply decreased and brokers left their jobs to find other
employment. Moreover, a very important side effect of the era was that schools and
universities no longer included courses related to capital markets Only recently,
students studying commerce (and not even all of them) are exposed to this subject.
Today, an average university graduate possesses only a shallow idea of how capital
markets and financial instruments work. Accordingly, people who invest their funds
in the capital markets are either professionals or self educated, which means that the
capital market is lacking a large number of potential investors.
II. Egypt Compared with other Countries
In this section, capital market statistics from 11 countries are analyzed and compared
with Egypt. The countries are: Argentina, Peru, USA, UK, Germany, Japan, Mexico,
India, Malaysia, Indonesia, and Korea. The data collected were from three main
sources. The International Monetary Fund (IFS), discussion papers of the International
Finance Corporation, and Bondware. Data for five years were collected and some
observations were made. Appendix II provides tables including these data.
GDP data reveals that the Egyptian economy is one of the smallest among the selected
countries. Only Peru and Malaysia are smaller. With regards to the development of
the financial sector, Egypt looks better than almost all other emerging economies. The
domestic credit granted stood at 99.8% of GDP as of the end of 1999 while countries
such as Argentina, Peru, Mexico, India, and Malaysia were significantly lower. This
indicates that the banking system is working well in Egypt since bank loans are the
preferred source of financing to the corporate community.
The Egyptian stock market also showed significant development over the five years
under review and it compares favorably with other developing countries. Egypt’s total
stock market capitalization stood at 37.2% of GDP at the end of 1999, well above that
of Argentina, Peru, Mexico, and Indonesia. It remains, however, significantly below
the level of developed countries.
The bond market did not exhibit as vigorous a development. The size of Egypt’s bond
market relative to the GDP, (6.2% at the end of 1999), was below that of other
countries. Only Peru, Japan, India, and Indonesia were below. This reveals the ample
room for bond market development in Egypt. As for the type of issuers, we were
unable to uncover reliable data, but a study by the IFC1 indicated that about 50% of
the emerging market bond issues were by the governments and 50% by the private
sector. This study also indicated that in the early stages of bond market development,
banks were usually the first issuers, which is what we see in the Egyptian market now.
The high interest rates were cited as one possible reason for preventing issuers from
going to the bond market. However, interest rates levels in some of these eleven
countries are often as high as in Egypt or even higher, yet bond markets are more
1
Anthony Aylward and Jack Glen. Primary Securities Markets: Cross Country Findings. IFC discussion
Paper number 39
Page 8 of 35
developed. Accordingly, the high interest rate level is not the main reason for the
under development of the bond market.
Another possible reason was the Shari’a laws that prohibit interest. Apart form our
discussion above which questions this possibility, Malaysia is a counter-example; it
also is an Islamic country yet exhibited strong bond market development.
In the following sections detailed survey of the Egyptian case will be made with the
purpose of highlighting the weaknesses.
III. The Government Bond Market:
The Egyptian Bond Market was revived by the government’s economic stabilization
program initiated with the help of the International Monetary Fund (IMF) in the early
90s. At the time, inflation surpassed 20% per annum and the budget deficit seemed
out of control. Government bond sales absorbed liquidity to help tame inflation and at
the same time financed the growing deficit.
III. A. Treasury Bills:
Until the early 90s, the savings and investments scene in Egypt was very simple.
Commercial banks were virtually the only available domestic institutions for
Egyptians savers to channel funds to investor/borrowers. There was an utter absence
of any instruments that could serve as a tools for the monetary authorities. Indeed,
there was no capital market to speak of, a situation that had gone on for about 40 years
and that profoundly affected the savings/investment culture.
With such a background along with public skepticism regarding the government’s
fiscal prudence, the logical first choice was a short-dated treasury bills. On January 3,
1991, the first LE100 million worth of Egyptian Treasury Bills was auctioned at an
average yield of 14.2%. These T-Bills were warmly received by the market
participants, mainly financial institutions; 42 bids were submitted for a total of LE
284.575 million, 2.84 times the quantity offered. There was clearly more appetite and
the government took advantage by additional T-Bill issues with original maturities of
91, 182 and 365 days. Over the years from 1991 until the present, the Central Bank
(on behalf of the government) has conducted 908 auctions and has sold T-Bills worth
LE 571 billion of varying maturities:
91 days
479
Number of issues
255.9
Value Issued
Source: Central Bank of Egypt
182 days
330
211
364 days
99
104.3
Total
908
571.2
Financial Institutions, primarily commercial banks, have found T-Bills very attractive
for a number of reasons:
First, they offer attractive yields compared to other investments and even to
interbank rates.
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Second, they can be included at full value in the liquidity reserves mandated
by the Central Bank
Third, until 1998, they were completely tax-exempt for institutions. Banks
could borrow in the interbank market at rates lower than the T-Bills yield,
invest in T-Bills, and deduct interest expense without adding to taxable
interest income. This ensured that Treasury Bills auctions remained very
active. The double tax exemption was rectified to some extent in 1998 by tax
law #5; this stipulated that T-Bill interest income was tax exempt only up to
the bank’s capital.
Issuance and Trading:
The Central Bank of Egypt holds two auctions for T-Bills each Week, one for the 91
days T-Bills and the other for the 182 days T-Bills according to the following schedul.
364 days are issued on a case by case basis as needed.
Bids Submitted:
Bids Processed:
Results Announced:
Source: Central Bank of Egypt
91 days
Tuesday
Wednesday
Thursday
182 days
Sunday
Monday
Tuesday
Bills are issued on a bid-price basis where bidders submit their bids stating a
discounted price with a minimum bid size of LE 25,000 or in integral multiples
thereof. Anyone can bid for T-Bills through financial institutions that maintain LE
accounts with the Central Bank of Egypt. Successful bidders (the ones with the
highest prices) are determined and an average yield for all accepted bids is announced.
All orders are filled at the average yield.
While the primary market remains active, the secondary market is relatively illiquid.
Most treasury bills are held to maturity by their original owners, whether financial
institutions or individuals.
At the moment, Treasury bills are traded over the counter with no market makers or
dealers involved. The most common way to dispose of T-Bills is to discount them at
a commercial bank. There are LE 28.3 billion worth of Treasury Bills outstanding as
of November 29, 2000 spread among the various maturities.
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Value of Outstanding Treasury Bills
Total Value Outstanding: LE 28.378 Billion
91 Days
20%
364 Days
51%
182 Days
29%
Source: Central Bank of Egypt
III. B. Government Bonds
The introduction of Treasury Bills was only the beginning of the economic reform
program. As part of that program, the government took steps to revive the Capital
Market and foster its role as an intermediary between savers and investors. The long
dormant stock market was resussitated by a privatization program and investors
moved up the learning curve very quickly. The time was right for the government to
start extending the maturities of its debt.
In 1995, the government issued its first longer dated bond in decades. The 12%
coupon issue had five years to maturity and a principal value of LE 3 billion, the
largest ever at the time. In the following year (1996) the government LE 4 billion
issue with a term of seven years. The longest dated government bond was issuee in
1999: LE 4 billion and a term of ten years.
Page 11 of 35
Value of Treasury Bonds Issued
4,500
4,000
3,500
LE Millions
3,000
2,500
2,000
1,500
1,000
500
1994
1995
1996
1997
1998
1999
2000
Source: Capital Market Authority
Issuance
Treasury bonds are sold without bidding, either competitive nor non-competitive.
Instead, the government decides on all the terms of the issue (size, term to maturity,
price) and then offers it for public subscription. All institutions and individuals are
allowed to subscribe. In case of over subscription, the issue is allocated pro-rata
usually after favoring individual investors.
The government selected this simplistic emission method primarily because few
financial institutions have the financial and human resources to operate as a primary
dealer. However, it may have resulted in sluggish trading in the secondary market.
Typically, subscribers intend to hold the issue until maturity so it is quite a challenge
to buy Treasuries in the secondary market, especially during an issue’s first year.
Trading
Bonds, treasury as well as corporate, are traded on the Cairo & Alexandria Stock
Exchange (CASE) in the same way shares are traded; they are quoted using dirty
prices (i.e. including accrued interest)
Egypt is one of the few countries that have seen the stock market develop before the
bond market and investors are thus more accustomed to stocks than to bonds. In fact,
for many individual investors, the characteristics of fixed income instruments are not
well understood. To be sure, there has been some improvement such as the
replacement of current yield by yield to maturity as a yardstick for comparing bonds.
But the knowledge base is still at early stage. Even the yield curve is poorly
understood. Mentioning duration and convexity would bring blank expressions to the
faces of many investment professionals.
The trading cycle moves in the following way:
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Buying Side
Selling Side
· Order Received
· Bonds verified with custodian
Execution on CASE
T
· Funds deposited in Broker’s
· Selling broker pays custodian
T+2
account at an authorized
for bonds and transmits them to
settlement bank
MCSD2
· MCSD debits funds from
· MCSD credits funds to selling
T+4
buying brokers account
broker’s
account
at
an
· MCSD delivers bonds and
authorized settlement bank
certificate of ownership to
buying broker
· Buying broker transfers bonds
to custodian
Source: EFG-Hermes, CASE
III. C. Government and Private Objectives
Traditionally, Treasuries constitute the most liquid bond market classe; this is natural
given that the Treasury is normally the largest issuer of bonds with varying maturities
in addition to enjoying the best credit status.
It is worth spending more time discussing objectives of the government and of
investors in Treasury Bonds. These objectives diverge but since both parties are
essential for an active bond market, both sets of objectives should be satisfied so far as
possible.
Clearly, the government’s main objective is to finance its deficit at a low cost, which
suggests issuing bonds to competitive bidders. But from the investors’ point of view,
there is a danger in competitive bidding: the “Winners Curse.” Original winning
bidders face the risk that secondary market prices will be lower. If this risk is severe,
the initial auction could conceivably unravel as everyone waits to buy in the secondary
market. One issue to be considered is whether a market such as Egypt’s, where
investors are less sophisticated than some other countries, is more prone to this
problem.
A second objective is the Central Bank’s desire to use the bond market to conduct
Open Market Operations, providing it flexibility in administering monetary policy.
Such an objective can be satisfied only through an active bond market. This
objective conforms well with one of the main objectives of investors, liquidity. No
investor wants to be stuck in a position that cannot be liquidated without realizing
significant losses. Also most investors would like to see liquidity in a multiplicity of
different issues.
2
Misr Clearance, Settlement, and Delivery
Page 13 of 35
Becaue investors have diverse horizons, various liquid maturities would be welcom.
Diversity and liquidity of government issues is crucial to an active bond market. This
would bring the further benefit of a representative yield curve, a benchmark for
pricing all other fixed income securities
III. D. New Instruments
The government has recently announced its intention to issue a Euro-dollar bond
issue. According to H.E. Medhat Hassanien, Egyptian Minister of Finance, the total
amount issued expected to be around $1 billion divided into two issues $500 million
each.
The rationale, as Mr. Hassanien explains it, is to attract foreign capital to make up for
the lack of savings within Egypt. Currently, the domestic savings level is not
sufficient to sustain the desired GDP growth rate of 6%. These bonds will also
provide a benchmark for Egyptian corporations wishing to borrow on the international
market.
The yield on such bonds should indicate the floor for corporate borrowers. Egypt is
considered an emerging market. The yield spread on Egypt’s eurobond over
sovereign issues of developed countries will, despite its investment grade, still be
subject to the global mood about emerging markets; (which at the moment may be
somewhat out of favor.)
If Egyptian banks are able to secure syndicated loans with maturities ranging from 4-5
years priced as low as 25bp over LIBOR, corporations might be well advised to
contemplate the issuance eurobonds. However, if the Egyptian government eurobond
spread over LIBOR exceeds 100 bp, Egyptian corporations who know they are good
credit risks might want to refrain from borrowing in the international markets.
In fact, another very important point is expected issue size. The size of the
government eurobond issue is small by international standards and could result in an
extra spread because of anticipated low liquidity. Size would be an even greater
concern if corporations decide to issue eurobonds themselves. It seems unlikely that
any Egyptian corporation could issue a bond in sufficient size to sustain a liquid
secondary market. Thus, a main benefit of the Egyptian government’s eurobond
would be as a pricing benchmark for international private placements.
The government has also shown greater flexibility in the range of products it could
issue. In an interview, Mr. Hassanien has mentioned that the government might be
considering an inflation indexed bond. There is nothing in the pipeline yet and we
don’t expect it anytime soon but it shows that the government would be considering
new instruments should the need for them arise.
Page 14 of 35
III. E. The Yield Curve
The Fixed Income Market’s development is greatly facilitated by the existence of a
default-free yield curve or term structure, which serves as the base for pricing all other
fixed income instruments. To develop a reliable yield curve from existing sovereign
bonds, they would, ideally,
·
·
·
·
Have Zero coupons
Be densely spread along the maturity spectrum
Be uniformly treated for tax purposes
Be Frequently Traded.
The desirability of the last three qualities is obvious, but the zero coupon attribute
might need a bit of explaining. An ordinary coupon bond is actually a portfolio of
zero coupon bonds, one bond with maturity at each scheduled coupon date. The
discounted present value of these payments, the market price of the bond, requires a
different discount rate for each coupon (unless the term structure is perfectly flat.)
Consequently, the yield to maturity of a coupon bond is a complicated weighted
average of diverse discount rates and is not necessarily representative of any given
point on the yield curve. This problem is exacerbated when coupons and amortization
of price discounts or premiums are treated differently for tax purposes.
If there are enough coupon bonds densely packed along the maturity spectrum, it is
sometimes possible to recover the underlying implied zero coupon yield curve by
recursive calculation. However, this would not be possible in Egypt presently because
of the paucity of issues with diverse maturities.
Using the seven yields to maturity available as of November 20, 2000, a very rough
estimate of the yield curve for Egyptian Treasury securities is plotted below.
Page 15 of 35
Treasury Yield Curve, November 20, 2000
11.00%
Yield (%/annum)
10.50%
10.00%
9.50%
9.00%
8.50%
8.00%
0.25
0.5
0.75
1
1.5
2
3
4
5
6
7
8
9
Term to Maturity (years)
The unusual shape of the yield curve depicted above is possibly attributable to
infrequent trading. For example, the three-year Treasury bond might have traded
yesterday while the five-year bond last traded two weeks ago. Between these dates,
the entire yield curve could have shifted so that the five-year yield now appears
abnormally low. Morever, with just seven points on the curve and no long-term zero
coupon bonds, there is considerable doubt about the true position of the curve beyond
six months.
We considered bootstrapping3 to create an implicit zero coupon curve but soon
realized that this would be a pointless exercise because:
·
Short-term T Bills provide a satisfactory starting point: They are
government securities, have no coupons, and are traded in an active
market (at least the primary market.) However, the next data point
after 182-day T-Bill was the three-year bond, which has several
intevening coupons.
·
Even these widely scattered observations do not represent synchronous
trades, so the likely occurrence of stale prices induces inevitable error
in every measured curve.
Despite all these problems, we think it is safe to surmise that the yield curve on
Egyptian treasury securities is upward sloping on average. This is typical of nominal
yield curves in most countries. This is not meant to suggest, however, that the yield
curve does not become downward sloping or even hump-shaped on occasion.
Theories of the term structure, which are beyond the scope of this report, explain yield
3
Bootstrapping proceeds from the shortest maturity (which generally has only one remaining payment)
and recursively solves for the implicit yield on each subsequent payment. If there are coupon bonds at
all maturities, this can uncover the zero coupon curve.
Page 16 of 35
curve dynamics including why they assume a given shape on a particular date and why
they have an upward slope on average.
III. F. A Primary Dealer System
At the moment, there are no primary dealers in Egypt. Under a primary dealer system,
selected institutions are granted an exclusive right to bid for a portion of a sovereign
issue for resale. Primary dealers make bids on behalf of their clients. They are also
entitled bid for their own account without necessarily having already lined up a buyer.
A primary dealer system is thought to render the local bond market more competitive
and enhance the liquidity in the secondary market. Such a system could also provide
more flexibility to the government in timing bond issues.
The move to a primary dealer system should be preceded by other steps to guarantee
its success. We believe that the first of such steps has already been taken by the
government by introducing the secondary dealer system. The government should
encourage more financial institutions to participate in the secondary dealer system;
among the institutions best suited to participate are commercial banks. After attracting
a pool of large secondary market dealers and giving them a sufficiently long
evaluation period, some of them should be invited to register as primary dealers. The
government could thereby have confidence that the new primary dealers would have
the resources and expertise necessary for a successful primary system.
Normally, any single primary dealer can not bid for more than a specified portion of
the issue under consideration; e.g., a maximum 20% of the issue. Hence, a sufficient
number of primary dealers should be selected so as to create a competitive
environment.
The presence of such primary dealers could be of great help to the government. Given
their position in the fixed income market, they could provide advice on both structural
issues such as regulations and market mechanics as well as operational issues such as
the best time and conditions to issue bonds. They could also provide insight as to
investor’s appetite for specific types of securities. Moreover, primary dealers could
help reduce the issuance cost for the government.
III. G. The Secondary Dealer System
Recently, the government passed a new law that will completely change the trading
process for bonds. The law paved the way for the establishment of bond trading
companies; these companies will be allowed to engage in proprietary trading, act as
market makers and to execute repos. The law also introduced new regulations
regarding the trading and settlement procedures for bonds. Under the new system,
bonds will trade based on clean prices and will trade over the counter, thereby
speeding up settlement.
Perhaps the more important effect of the new law is its effects on the transaction costs.
Under the new law, bonds traders deal as principals. There will be no brokerage
commission but only bid-ask spreads. The spread is expected to be relatively high in
Page 17 of 35
the beginning as there is limited competition and incomplete understanding of the
system. However, as the market develops and there are more bond dealing companies,
we expect this spread to decrease to close to international levels thus reducing the
overall transaction cost.
At the same time, there is a point of concern regarding the new law. Under the new
law, bonds (and stocks) traded through the central clearance system by registered
brokers would be covered by the Settlement Guarantee Fund, an entity which
intervenes when one of the involved parties cannot meet its settlement obligations.
The Fund settles the trade and can impose a fine on the responsible party. The Fund
almost completely removes settlement risk in securities trading. We strongly
recommend that under the new system, bond trading would still be covered by that
fund.
At the moment only two companies have obtained licenses to operate as secondary
market bond dealers.
To enhance liquidity, it would be most desirable to have a number of market makers
quoting bids and offers for every bond at all times. Dealers as a group should find it
in their own interest to promote the bond market so as to broaden the investor base
and increase the demand for trading services.
In our opinion, market makers should be allowed to go short on individual securities
perhaps within a limit relative to their capital base and provided that their overall
position remains positive or square. Such activity should help further enhance the
liquidity of the bond market.
IV. The Corporate Bond Market
IV. A. The Current Situation
One of the issues tackled during the economic reform program in the early 90s was a
legal clause in the old law limiting the coupon rate of any corporate entity to a
maximum of seven percent per annum. While this should not have been a major
hindrance to issuing corporate bonds since they could be issued at a discount, it was
an unnecessary complication. Following the adoption of law # 95 and the
development of the Treasury Bills program, some corporations took advantage of the
possibilities offered by the capital markets. Perhaps surprisingly, banks were not the
first corporate; instead the pioneering event came from Hoechst Orient (A subsidiary
of Hoechst International).
Hoechst issued bonds worth LE 30 million with an original maturity of five years and
a floating rate equal to the average annual rate on 182 days T-Bills + 50bp. The deal
was arranged and guaranteed by Banque Pari-Bas.
Banks caught on very quickly and in December 1995, the Egyptian Land Bank
(Currently merged with the Arab Land Bank to create the Egyptian Arab Land Bank)
Page 18 of 35
issued LE 10 million worth of five-year notes at a fixed rate of 12% per annum paid
semi-annually. In 1996 and 1997, banks completely dominated the new issues bond
market. The figure below plots new issue volume over the past several years.
Value of Corporate Bonds Isuued
LE Millions
4,000
3,000
2,000
1,000
1994
1995
1996
1997
Non- Bank
1998
1999
2000
Banks
Over the past few years, both the total value of issues and the typical size of each issue
have increased. For non-financial corporations, the average issue size increased from
LE 30 million to a peak of LE 214 million in 1999 before declining slightly to LE 196
million in 2000 (it is worth noting that there were only 2 issues in 2000). The trend
for banks was quite similar although the average issue size was always larger with the
exception of the year 2000 (to date) where no financial institution has issued a bond.
Thus far, 1999 was the most active year for bonds in terms of total value issued,
number of new issues, and average size per issue. This was also one of the most
volatile years in the stock market, which plunged during the first half of that year
before rebounding in the second half.
One might expect expanded bond issuance during volatile periods of the stock market.
Corporations in such years find it risky to raise equity funds so they resort to the bond
market instead. At the same time, when investors suffer stock market losses, they find
bonds more appealing.
Page 19 of 35
Average Issue Size
250
LE Millions
200
150
100
50
1994
1995
1996
Corporates
1997
Banks
1998
1999
2000
Total
As of November 23, 2000, there are 28 corporate bonds issues outstanding and one
that has already matured. Banks as a group were the largest issuers with fifteen. Of
those 28 issues, only 11 were fixed rate including one that was convertible. Of the
remaining 17, 15 were linked to the treasury bills rate and the remaining two (both
issued by the Arab Land Bank) used the Central Bank’s discount rate.
The treasury bill linked bonds tended to match the frequency of the coupon reset
dates; i.e. 91 day T-Bill rate for bonds paying interest quarterly and 182 day bills for
those paying interest semi-annually. Only two issues deviated from that rule; both
issues belong to the Egypt Industrial development Bank. As for those paying interest
annually, they opted to use the 182 days T-Bills rate because the 365 days T-Bills are
no longer issued.
Despite the activity in the corporate bond market in the last couple of years, the debt
market remains dominated by treasury issues. During the period from 1994 until
November 15, 2000, LE 22.155 billion worth of debt securities were issued in Egypt
of which LE billion were issued by the Egyptian Treasury, 72% of the total.
Page 20 of 35
Debt Issuance Market in Egypt
1994 - Nov. 15, 2000
Total Debt Issued: LE 22.155 billion
Corporates
28%
Treasury
72%
Source: Capital Market Authority
IV. B. The Credit System
Regulations for issuing a corporate bond
The Capital Market Authority regulates the issuance process for corporate bonds. It
allows any joint stock company to issue bonds4 or other debt claims to finance the
company operations provided that:
·
·
The company obtains a credit rating from an approved rating company and that
rating not be lower than BBBThe company clearly points out the rating and what it means in the offering
prospectus.
The board of directors of the Capital market Authority has the right to allow any
company to proceed with its debt offering even though one or both of the above
conditions are not met.
The law requires any company issuing bonds to receive prior approval from its general
assembly and the law also stipulates that the general assembly must approve the
interest rate on the bonds its method of calculation.
The law also allows for the creation of a bondholder association which oversees and
protects bondholders’ rights. The association selects a monitoring agent who should
not be one of the directors or board members of the issuing company nor of a
company that owns 10% or more of the equity of the issuing company. The agent has
4
Companies were previously restricted from issuing bonds or other debt securities in excess of their
tangible networth as determined by the auditors according to the last financial statements. This
restriction was removed in 1998.
Page 21 of 35
the right to attend the general assembly of the company and to submit proposals from
the bondholder association to the board; he is not allowed to intervene in the
management of the company.
Rating
As mentioned earlier, an approved credit rating of BBB- or better is mandatory for any
company wishing to issue bonds. This means that the CMA has prohibited high yield
bonds (also called Junk Bonds.)
At the moment, there are two local companies which operate as rating agencies:
- Nile rating (affiliated with Fitch Ibca)
- DCR Finbi (affiliated with Duff & Phelps)
Those are also four international agencies approved by the Capital Market Authority
as accepted rating agencies:
-
Standard & Poor’s
Moody’s
Fitch Ibca
Bank Watch
Credit Enhancement
To enhance the credit quality, some corporate issuers seek the guarantee of a local
bank to reduce default risk and reassure lenders. However, the Central Bank became
alarmed because very small companies with a high credit risks were attempting to use
this mechanism, thereby increasing the credit risk of the banks issuing guarantees.
The Central Bank has therefore decided that it must approve in advance any bank
guarantee.
At the moment, there are no derivatives in Egypt so bank guarantees are the only
means of credit enhancement.
Bankruptcy and Distress
The capital market law does not specify bankruptcy procedures for companies issuing
bonds. In case of default, the commercial code go into effect. Unfortunately,
bankruptcy procedures under the commercial code are cumbersome and protracted. It
usually takes more than a year to obtain a final bankruptcy ruling. Thus, an urgent
reform involves amending the capital market law to specify more efficient procedure
in the event of bond default. Conditions defining financial distress are not widely
agreed upon in Egypt. These would be well worth considering, not only for bond
issuers but for borrowers in general.
Assessment of Knowledge Base
As discussed in an earlier section of this paper, due to recent Egyptian history, the
fixed-income expertise of both issuers and investors has not been well developed. We
Page 22 of 35
have discussed bonds with a number potential issuing companies. A typical attitude
was that strict disclosure requirements are objectionable. Even some companies
whose equities are already listed on the stock exchange made this point. They
explained that financial statements are submitted as required by the law but that they
would not want to release detailed information to rating agencies nor to publish a
prospectus. Other remarks we received indicated that the finance professionals or the
senior management of these companies were not aware of the benefits of bonds, such
as the ability to better structure the companies’ balance sheets through providing long
term finance, reduce costs in some cases
Also, a significant number of these companies state that they are satisfied with bank
borrowings and do not see a compelling need for bonds so long as banks provide
evergreen financing. It is to be noted that the majority of bank facilities are short
term, but evergreen. This enables borrowers to finance long term projects through
short term credit facilities which are not subject to any significant restrictive
covenants. An implication of this response, however, reveals why regulations
restricting junk bond issuance are probably very ill-advised and are likely to inhibit
growth. It is precisely those high-risk start-up companies with good ideas that do not
have access to bank financing. Many such companies might fail, but a solid fraction
will probably be the growth engines of the future economy.
On the lending side of the equation, individual investors’ also generally lack fixed
income expertise. While they have proved to be quick learners, organized
training/educating programs would be highly desirable on all levels: academic,
professional, and general public. We understand that efforts are being done in this
regard by both the Capital Market Authority and the stock exchange.
V. Taxation
Currently all securities in Egypt enjoy exemption from all types of taxes. In 1992,
when the capital market law first came into effect, a capital gains tax of 2% was
imposed on all securities. This was later abolished in 1997 for individual investors but
was retained for institutional investors. In 2000, taxes for institutional investors were
also abolished. We applaud this tax exemption; any reimposition of taxes is likely to
slow down capital market development.
VI. Markets for the Future
One of the most important segments of the bond markets is the mortgage market.
Typically, this sector of the fixed income market is the largest in the world, with an
estimated size just in the United States of roughly US$ 6 trillion, far exceeding any
other sector in the fixed income market. The starting point for developing this market
in Egypt is a mortgage law.
Page 23 of 35
Mortgage activity will lead naturally to the creation of new types of financial
instruments such as the collateralized mortgage obligations (CMO’s) and stripped
mortgage backed securities. CMO’s are bond classes created by the redistribution of
cash flow of mortgage-related products so as to mitigate prepayment risk. The CMO
does not eliminate the prepayment risk, but allows it to be allocated among different
classes of bond holders who are more or less risk tolerant.
The stripped mortgage backed securities is created by altering the distribution of
principal and interest which also results in a variety of instruments suitable to different
investor classes.
Mortgage loans can be repackaged into a variety of instruments, but the basic law has
to be there. Egypt currently does not have a mortgage law and the thus no market
exists. However, the government has drafted a law and is expected to present it to the
parliament for discussion and approval within the first quarter of 2001. With a
population of 65 million, and a chronic housing problem, the law can be of great
value to Egypt if properly structured. Once that happens the mortgage bond market
will develop.
The Mortgage Law
The draft of the law was published and made available to market participants for
discussion purposes. While the details are subject to change, the main provisions are
expected to be as follows:
•1
Banks, Insurance companies, and mortgage companies will be allowed to
grant mortgage loans.
•2
Legal requirements will be simplified to ensure a smooth and low cost
procedure to register property and provide security collateral for lenders.
•3
Foreclosure on collateral property will be governed by pre-specified
conditions for loans in default.
•4
A guarantee fund will be created to protect lenders against default risk.
•5
Securtization will be allowed.
•6
Minimum capital requirements will be imposed on companies engaged in
securitization activity.
Since securitization will be allowed and credit enhancement will be introduced
through the guarantee fund, the law promises to have a very positive impact on the
depth and breadth of the bond market.
The size of the mortgage market is potentially very large. If we assume that over five
years 20% of the population will finance residential purchases with mortgage debt,
Page 24 of 35
and that the average loan size will be about LE 50,000, total mortgage will amount to
about 650 billion Egyptian pounds, far exceeding in size the current bond market.
Other fixed income instruments, such as factoring, asset-backed securities and trade
credit would develop more vigorously with an improved legal structure. We
recommend that the government places such refroms on the legal agenda, though at a
priority below that of mortgages.
Conclusion And Summary Of Recommendations:
There is no doubt that Egypt took plausible steps in developing its capital market in
the past decade; however, and contrary to most other markets, the equity market
developed at a much faster rate than the bond market which still lags behind other
markets of similar economic conditions.
Egypt still needs to speed the development of its bond market which, in turn, will help
in the economic development of the country. Our view is that government efforts
should concentrate in developing the government bond market as well as the markets
of the future and let the corporate bond market follow in its footsteps.
The main issues in developing the government bond markets are liquidity, diversity,
and pricing. Diversity could be easily achieved through the issuance of bonds with
varying maturities (from the 91 days treasury bills to a 30 years government bond.)
Liquidity in the primary market could be improved through the use of a Primary
Dealers System while in the secondary market, there is a need for a fairly large
number of secondary dealers. It is also strongly recommended that pricing of the
government bonds be done through auctions to ensure a market driven rate.
In order to increase awareness among market professionals, we recommend that the
current efforts done by the CMA and the Stock Exchange in education/training
programs be expanded and sponsored to reach as many professionals as possible.
On top of the markets of the future that deserves close attention is the Mortgage
Backed Securities market. Priority should be given to pass the mortgage law first
which then will create a whole new market (Development of the Mortgage Backed
Securities market should be discussed in a separate paper).
In addition, the government also needs to do some work on the legal front regarding
issues that might hamper the development of the corporate bonds market. A major
issue is developing a law dealing with bankruptcy and companies in distress; a new
regulation speeding up the process and finding a balance between the company's
interest and the investors' interest should be drafted and discussed. Also we urge the
reconsideration of the regulations prohibiting any non-investment grade corporate
from issuing bonds.
Page 25 of 35
Table 1: Gross Domestic Product (GDP)
(in US$ millions)
1995
1996
1997
1998
1999
Argentina
258,032
272,422
293,152
298,429
283,152
Peru
52,260
52,606
57,542
52,856
50,101
USA
7,400,500
7,813,200
8,300,800
8,790,200
9,299,200
UK
1,106,603
1,283,851
1,331,900
1,416,819
1,441,054
Germany
2,457,621
2,306,406
2,045,980
2,261,925
1,991,461
Japan
4,699,212
4,313,017
3,921,855
4,312,275
4,847,114
Mexico
240,369
318,920
393,274
384,307
590,983
India
335,975
379,056
385,858
414,927
N/A
Malaysia
87,518
100,329
72,430
74,862
78,735
Indonesia
196,930
223,513
134,988
117,488
151,745
Korea
486,903
495,828
267,419
369,076
385,569
Egypt
60,472
67,385
75,635
82,710
88,781
Page 26 of 35
Table 2: Domestic Credit
(in US$ millions)
1995
1996
1997
1998
1999
Argentina
71,908
76,840
89,004
97,216
100,724
Peru
6,424
6,947
11,245
12,904
13,825
USA
5,674,800
6,006,100
6,493,700
7,148,100
7,690,500
UK
1,364,011
1,633,316
1,680,040
1,738,879
1,828,754
Germany
3,131,217
3,111,075
2,866,470
3,285,415
2,930,581
Japan
6,401,634
5,753,103
5,201,693
5,969,810
6,974,755
Mexico
101,645
87,133
146,848
133,920
139,778
India
149,446
175,174
179,338
191,879
220,911
Malaysia
110,892
143,378
117,159
119,611
119,810
Indonesia
102,052
121,187
78,054
69,515
95,559
Korea
275,726
302,417
185,594
291,677
362,149
Egypt
49,203
56,357
65,537
78,531
88,640
Page 27 of 35
Table 3: Discount Rates
1995
1996
1997
1998
1999
Argentina
17.85%
10.51%
9.24%
10.64%
11.04%
Peru
18.40%
18.20%
15.90%
18.70%
17.80%
USA
5.25%
5.00%
5.00%
4.50%
5.00%
UK
6.69%
5.69%
6.58%
7.21%
5.33%
Germany
3.00%
2.50%
2.50%
2.50%
2.50%
Japan
0.50%
0.50%
0.50%
0.50%
0.50%
Mexico
58.50%
36.89%
24.55%
28.70%
25.87%
India
15.46%
15.96%
13.83%
13.54%
12.54%
Malaysia
7.63%
8.89%
9.53%
10.61%
7.29%
Indonesia
13.99%
12.80%
20.00%
38.44%
12.51%
Korea
5.00%
5.00%
5.00%
3.00%
3.00%
Egypt
13.50%
13.00%
12.25%
12.00%
12.00%
Page 28 of 35
Table 4: Stock Market Capitalization
(in US$ millions)
1995
1996
1997
1998
1999
Argentina
36,365
43,955
54,365
43,191
37,669
Peru
7,797
8,607
9,370
5,777
6,584
USA
4,755,021
6,028,431
7,946,387
11,133,161
13,874,946
UK
1,125,666
1,464,581
1,833,632
2,155,392
2,696,076
Germany
236,545
303,780
372,312
542,658
1,266,023
Japan
3,397,630
2,922,719
2,171,057
2,422,130
4,665,993
Mexico
60,342
77,371
119,200
77,180
134,531
India
67,087
72,768
89,876
70,649
134,454
Malaysia
137,267
181,459
63,295
64,160
98,638
Indonesia
50,339
68,229
27,035
18,798
42,196
Korea
111,543
79,092
28,555
90,237
257,999
Egypt
Page 29 of 35
Table 5: Total Stock of Bonds Outstanding
(in US$ millions)
1995
1996
1997
1998
1999
Argentina
11,766
16,353
27,912
40,789
50,560
Peru
60
60
60
150
150
USA
250,247
324,189
435,662
562,239
823,302
UK
193,740
218,872
259,652
308,956
357,535
Germany
100,669
173,860
284,879
498,453
836,583
Japan
236,970
212,262
196,436
167,178
136,829
Mexico
20,278
25,917
39,571
49,169
49,200
India
3,580
4,121
4,928
6,539
6,206
Malaysia
7,168
9,401
11,566
11,113
13,930
Indonesia
2,010
2,344
3,018
3,110
2,724
Korea
20,612
28,678
42,992
53,256
52,891
Egypt
Page 30 of 35
Table 6: Exchange Rates
1995
1996
1997
1998
1999
Argentina
1
0.9995
0.9995
0.9995
0.9995
Peru
2.31
2.6
2.73
3.16
3.51
USA
1
1
1
1
1
UK
0.6452
0.5889
0.6047
0.6011
0.6187
Germany
1.4335
1.5548
1.7921
1.673
0.9954
Japan
102.83
116
129.95
115.6
102.2
Mexico
7.6425
7.8509
8.0833
9.865
9.5143
India
35.18
35.93
39.28
42.48
43.49
Malaysia
2.542
2.529
3.8919
3.8
3.8
Indonesia
2308
2383
4650
8025
7085
Korea
775
844
1695
1204
1138
Egypt
3.39
3.388
3.388
3.388
3.405
Page 31 of 35
Table 7: Domestic Credit/ GDP
1995
1996
1997
1998
1999
Argentina
27.9%
28.2%
30.4%
32.6%
35.6%
Peru
12.3%
13.2%
19.5%
24.4%
27.6%
USA
76.7%
76.9%
78.2%
81.3%
82.7%
UK
123.3%
127.2%
126.1%
122.7%
126.9%
Germany
127.4%
134.9%
140.1%
145.2%
147.2%
Japan
136.2%
133.4%
132.6%
138.4%
143.9%
Mexico
42.3%
27.3%
37.3%
34.8%
23.7%
India
44.5%
46.2%
46.5%
46.2%
Malaysia
126.7%
142.9%
161.8%
159.8%
152.2%
Indonesia
51.8%
54.2%
57.8%
59.2%
63.0%
Korea
56.6%
61.0%
69.4%
79.0%
93.9%
Egypt
81.4%
83.6%
86.7%
94.9%
99.8%
Page 32 of 35
N/A
Table 8: Stock Market Capitalization/ GDP
1995
1996
1997
1998
1999
Argentina
14.1%
16.1%
18.5%
14.5%
13.3%
Peru
14.9%
16.4%
16.3%
10.9%
13.1%
USA
64.3%
77.2%
95.7%
126.7%
149.2%
UK
101.7%
114.1%
137.7%
152.1%
187.1%
Germany
9.6%
13.2%
18.2%
24.0%
63.6%
Japan
72.3%
67.8%
55.4%
56.2%
96.3%
Mexico
25.1%
24.3%
30.3%
20.1%
22.8%
India
20.0%
19.2%
23.3%
17.0%
N/A
Malaysia
156.8%
180.9%
87.4%
85.7%
125.3%
Indonesia
25.6%
30.5%
20.0%
16.0%
27.8%
Korea
22.9%
16.0%
10.7%
24.4%
66.9%
Egypt
13.6%
21.1%
27.4%
28.6%
37.2%
Page 33 of 35
Table 9: Bonds/ GDP
1995
1996
1997
1998
1999
Argentina
4.6%
6.0%
9.5%
13.7%
17.9%
Peru
0.1%
0.1%
0.1%
0.3%
0.3%
USA
3.4%
4.1%
5.2%
6.4%
8.9%
UK
17.5%
17.0%
19.5%
21.8%
24.8%
Germany
4.1%
7.5%
13.9%
22.0%
42.0%
Japan
5.0%
4.9%
5.0%
3.9%
2.8%
Mexico
8.4%
8.1%
10.1%
12.8%
8.3%
India
1.1%
1.1%
1.3%
1.6%
Malaysia
8.2%
9.4%
16.0%
14.8%
17.7%
Indonesia
1.0%
1.0%
2.2%
2.6%
1.8%
Korea
4.2%
5.8%
16.1%
14.4%
13.7%
Egypt
1.5%
3.5%
3.6%
4.0%
6.2%
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N/A
Table 10: Real Interest Rates
1995
1996
1997
1998
1999
Argentina
13.96%
10.29%
8.70%
9.66%
8.48%
Peru
6.56%
6.01%
6.71%
10.66%
13.86%
USA
2.41%
2.04%
2.61%
2.84%
2.79%
UK
3.17%
3.21%
3.25%
3.68%
3.72%
Germany
1.25%
1.08%
0.61%
1.52%
1.91%
Japan
0.60%
0.40%
-1.18%
-0.19%
0.80%
Mexico
17.45%
1.85%
3.27%
11.03%
7.95%
India
4.72%
6.39%
6.23%
0.31%
7.50%
Malaysia
2.25%
5.21%
6.75%
5.07%
4.40%
Indonesia
4.19%
4.44%
12.50%
-12.23%
-6.61%
Korea
0.49%
0.10%
0.50%
-4.17%
2.13%
Egypt
-1.94%
5.41%
7.34%
7.49%
8.65%
Page 35 of 35