Will the new primary dealers system revive the idle bond market? Sherine Abdel-Razek reports The first auction to sell Egyptian government bills through the new Primary Dealers System occurred earlier this week. The long anticipated mechanism aims to stimulate the bond market via the issuance of government bills and bonds and corporate bonds. According to the Primary Dealers System, the Central Bank of Egypt granted exclusive rights to preselected financial institutions to bid for bonds and bills in the primary market. The big four public banks plus nine joint venture and private banks were selected by the Ministry of Finance to be primary dealers. The first two offers, bills with maturity of 182 or 91 days, were issued last week according to this new mechanism and the market was bought out by the 13 primary dealers long before the end of the subscription period. Banks are eager to join the bidding as they are attracted to the high yields compared with other kinds of investments. Also, the value of the acquired government securities count towards the CBE's required reserve level for commercial banks. According to an anonymous source from the Ministry of Finance, the mechanism will be used only for treasury bill transactions in the first three months, then it will be expanded to include longer maturity treasury and corporate bonds. In a recent conference, former Minister of Finance Medhat Hassanein stressed the importance of the new system as a means to activate government securities offers and help create a variety of different bond yields with different maturity periods. "This yield curve will be used as a benchmark to price corporate bonds and thus give a push to this stagnant market," Hassanein said. The bond market is an integral part of any economy. Using the government securities, central banks conduct open market operations to manage liquidity in the economy. Moreover it is a way to finance the country's needs without increasing foreign debt. As for the corporate bonds, they are a main source of income for even the most lucrative businesses, especially in light of the banking sector's credit tightening policies. The value of listed bonds in the Egyptian market is currently LE20 billion, with LE14 billion in government bonds and bills and LE6 billion in corporate bonds. Bond transactions are infrequent and on average count for only 10 per cent of the overall market transactions. But how would the new system help in making this picture brighter? A study on the bond market in Egypt prepared by Yasser Hassan, the managing director of Watany Bank of Egypt, states that the presence of such primary dealers could be of great help. "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 into investor's appetites for specific types of securities. Moreover, primary dealers could help reduce the issuance cost for the government as they offer competitive bids," the study stated. Nevertheless some market conditions might hinder efficient utilisation of the system. Noureddin Mohamed, sales trader at EFG Hermes Fixed Incomes, points out that the current high interest rates on bank deposits and inter-bank transactions are an obstacle for the new system. "Corporations have to issue bonds with higher rates than the rates on bank deposits to make it a more appealing investment. This makes the cost of acquiring credit higher for companies which thus become reluctant to issue bonds," Mohamed said. Making sure that these issues will be well traded in the secondary market, where they are repurchased by different investors, is another prerequisite for the full utilisation of the Primary Dealers System. The diversity of the traded bonds, created through the issuance of bonds with varying maturity periods, (from the 91 days treasury bills to a 30 year government bond) could be another beneficial factor. Hassan's study also strongly recommends government bonds being sold at auction to ensure a market driven rate. Experts also agree that expanding the mortgage market will boost the bond market. This sector of the fixed income market is the largest in the world, with an estimated size in the United States alone of roughly $6 trillion, far exceeding any other fixed income sector.
