- Abdul Basir Hassan
- BBC – Cairo
Egypt offered sovereign Islamic sukuk, guaranteed by the Ministry of Finance, at a value of one and a half billion dollars for the first time in the country’s history, this week.
The yield of these sukuk is almost the highest in the world at 11 percent, despite its decline by more than half a percent from its guiding price, which was 11.625 percent.
The Egyptian offering of sukuk came to pay international financial obligations (debts) due during the last week of February.
According to a statement by the Egyptian Ministry of Finance, subscription requests amounted to about $6.1 billion, which means exceeding the value of the issue by more than four times.
Finance Minister Mohamed Maait made it clear that this issuance witnessed a remarkable turnout, with more than 250 investors in various global financial markets submitting purchase requests.
Maait described the result of the offering as successful in light of “turbulent global economic and political conditions,” while he attributed the high financing cost to a sharp inflationary wave.
The Egyptian minister, whose ministry is a sovereign guarantor of these sukuk, considered the result “a strong message of confidence from global financial markets and investors in the Egyptian economy and its future, and its ability to deal flexibly with internal and external challenges.”
Maait said that his ministry succeeded in establishing an international program for issuing sovereign sukuk for the next several years, at a value of $5 billion, and was registered on the London Stock Exchange.
Sovereign Islamic sukuk in Egypt are governmental, negotiable securities, issued for a specified period, not exceeding thirty years, and represent common shares in the usufruct rights of assets.
On August 18, 2021, Egypt issued the Sovereign Sukuk Law, which aims to attract investments in Egyptian debt instruments and projects from investors, countries, and sovereign funds that prefer transactions that are compatible with Islamic law. They do not invest in traditional debt instruments.
According to the Sukuk Law in Egypt, sovereign sukuk are issued in their legal forms through the Sovereign Issuance Company, taking into account the determination of the assets that will be taken as the basis for issuing these sovereign sukuk.
Very high yield
Rashad Abdo, head of the Egyptian Forum for Economic Studies, endorses Maait’s claim that “the success of the offering is evidence of the Egyptian economy’s ability to withstand unfavorable conditions globally and regionally, and that it sends a good message to international institutions, donors and investors in general.”
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The Egyptian pound witnessed an unprecedented decline against the dollar
However, Abdou, who is also an economist, believes that the great demand by investors to invest in Islamic sukuk offered by the Egyptian Ministry of Finance is mainly due to the “very high interest rate” for these sukuk, “especially since Islamic sukuk are always linked to a guarantee from the borrower that guarantees the lender that he will obtain On his money anyway.”
He adds that this return is attractive to any investor because it “guarantees him to obtain his dues or the bulk of them in the event of any possible default by the government on payment.”
A few days before the issuance of the first tranche of sukuk, Moody’s credit rating agency granted the announced program of the Ministry of Finance for sovereign sukuk worth $5 billion, a rating of B3 (P).
In a report in the first week of February, Moody’s downgraded Egypt’s rating for the first time since 2013 from B2 to B3, while changing its outlook from negative to stable.
In its justification for this reduction, the agency’s report referred to the low levels of foreign exchange liquidity in the country, and the country’s ability to absorb shocks.
Therefore, observers believe that such and similar evaluations from other institutions cast a shadow over the Egyptian government’s ability to borrow to meet the requirements of its 104 million population, as well as to pay off its external debts on time.
Tarek Metwally, former Vice President of Blom Bank Egypt, says that the indicative interest rate, as well as the one agreed upon at the end of the offering, is “perfectly appropriate” for the current conditions the Egyptian economy is going through and the risk assessments announced by international institutions, including the downgrade of Egypt’s credit rating, in addition to the rise in the price of the dollar globally. .
alternatives
According to the external debt data published on the Central Bank’s website in mid-February, the total external debt decreased by $728 million, to record $154.9 billion at the end of last September, compared to $155.7 billion at the end of June of the same year.
However, data on Egypt’s foreign exchange reserves remain much lower than their level in this month last year, when the war in Ukraine began.
Despite its relative improvement in the latest Central Bank data at the beginning of February, when it reached $34.2 billion, it lost about 20 percent from the level of $41 billion at the end of February last year.
Last January, the IMF estimated that Egypt’s financing gap would reach about $17 billion over the next 46 months, in light of the decline in its foreign exchange resources and the high cost of its imports as one of the largest countries in the world importing its food and the first importer of wheat in the world.
Abdo says that Egypt has already obtained sovereign loans from many donors, such as international institutions such as the International Monetary Fund or the Gulf countries, and others.
He believes that part of Egypt’s crisis, like that of many developing countries, is “the mismanagement of its various resources, especially its natural wealth, due to its use of trust at the expense of competencies, and the spread of forms of corruption that waste resources.”
Metwally agrees with what Abdo said that there are many alternatives that should be better invested, especially in the tourism sector.
Metwally adds that “taboos” must be removed with regard to the state’s exit from many productive sectors, praising the state’s tendency to offer more than thirty companies for partnership, sale to a strategic investor, or trading on the stock exchange.
Metwally adds that most countries in the world left “investment in most productive sectors to the private sector” to maximize their resources and investments and improve management.
Earlier this February, the Egyptian government announced a plan to sell its shares in 32 companies, starting in the first quarter of this year until the end of March 2024.
Prime Minister Mostafa Madbouly said in a conference on that occasion that there are three forms of offering companies, either offering some of these companies for public trading on the stock exchange, or selling controlling stakes in some others to “strategic investors.”
In the middle of last year, Madbouly announced the exit of more than $20 billion of so-called hot money (temporary foreign investments) from Egypt against the background of the Corona and war crises in Ukraine, indicating that Egypt seeks to raise the share of the private sector in the economy from 35 percent to 65 percent in order to He raised $40 billion in investments in the next three years.
global bond market
The global Islamic sukuk market is estimated at about $2 trillion, indicating that it is a popular market adopted by the major economies in the world, led by the British economy.
He pointed out that Egypt was late in adopting this path until it was able to issue the necessary legislation for it recently, and that it is one of the means used by governments to diversify funding sources.
Abdo says that this type is conditional on agreement between the two parties on the form of investment, either “Murabaha or Musharaka” and differs from bonds in that it “is subject to a specific guarantee provided by the borrower after agreeing on a specific return that is in accordance with the rules of Islamic law.”
He pointed out that a committee comprising economists, clerics, jurists and bankers is responsible for formulating mechanisms for this type of financing.
Last December, the Egyptian government reached an agreement with the International Monetary Fund to obtain a loan of $3 billion, and to switch to a permanently flexible exchange rate system, which led to a decline of the pound against the dollar by nearly 100 percent compared to before the Ukrainian war.
In June 2022, Egypt announced that it had paid outstanding loans and state bonds worth about $24 billion since the beginning of the year, including $10 billion in foreign debts, and $14 billion in foreign funds.