Egypt eclipses Dubai in cost of default protection

The cost of insuring Egypt's government debt against default has risen above the cost of insuring Dubai's, a sign of growing concern about political stability ahead of elections scheduled to begin next month. Egypt's credit default swap spreads, which track the amount of money investors would have to pay for protection against a debt default, rose above Dubai's on Tuesday for the first time in about a month, according to a Bloomberg News report.

Dubai's swap spreads have been some of the highest in the region since the onset of the financial crisis forced several big government-owned businesses to restructure debt to avoid default.

"We should never underestimate the importance of the political process, especially in emerging markets," said Plamen Monovski, the chief investment officer at Renaissance Asset Managers.

"In Egypt, it is simply unclear which way things will go, but there is quite a real possibility Egypt will go anti-business."

Perceptions of risk have also risen in Egypt because of a recent downgrade of the country's debt by Standard and Poor's, a global credit ratings agency.

Political instability has also persisted since the country's revolution in February ousted Hosni Mubarak from the presidency.

For investors, Egypt was in some ways "genuinely uncertain", Mr Monovski said.

The continuing turmoil and uncertain political future have also prompted global bodies to reduce projections of economic growth in Egypt.

The country's GDP grew about 5 per cent in 2009 and last year but is projected by the IMF to grow by just 1.2 per cent this year.

Growth has been dampened by the effect of the revolution on the country's critical tourism industry as well as a fall-off in foreign investment and trade with Europe.

Many investors are waiting on the sidelines until Egypt's political situation stabilises. S&P's downgrade this week "reflects our opinion that risks to macroeconomic stability have risen during the transition period for Egyptian political reform," Trevor Cullinan, an S&P analyst, said in a report on Tuesday.

"A further downgrade is possible if the political transition toward a more pluralistic society does not proceed as smoothly."

* with Bloomberg News

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