Egypt Revives Debt Strategy With Plans for Eurobonds, First Sukuk

Egypt is looking to get its debt strategy on track after it was thrown off course by the global pandemic as foreign investors flock back to local assets.

For one of the Middle East’s most indebted countries, the goal is to ease the cost of borrowing by extending maturities and diversifying funding sources. Egypt is planning to entice a new class of investors by issuing its first sukuk, or Islamic bonds, in both local and international markets in the fiscal year that started this month, according to Mohamed Hegazy, head of the Finance Ministry’s debt management unit.

Now it has International Monetary Fund backing, and offers one of the world’s biggest carry-trade returns this year, Egypt saw its first inflows in June after three months of capital flight.

Egypt Revives Debt Strategy With Plans for Eurobonds, First Sukuk

“Attractive yields and reaching an agreement with the IMF helped us attract foreign inflows in this difficult time,” Hegazy said in an interview.

Egypt’s local-currency bonds gained 6.8% this year; the average return across emerging markets was flat.

Outside investors have pumped billions of dollars into Egypt’s debt market since a 2016 currency devaluation, part of a sweeping economic program. After a record Eurobond sale in May, Egypt’s considering issuing up to $7 billion this fiscal year.

“We could tap the international bond market in this fiscal year if needed with dollar-denominated bonds and/or euro-denominated bonds issuance with the same size as last year,” Hegazy said.

Before the virus struck, the government made headway in ending its reliance on short-term borrowing. In February, it met its target of tripling the size of Treasury bond sales and raising the share of longer-dated debt to 40% of annual domestic issuance, double the level in the fiscal year that ended June 2018.

Momentum reversed with a virus-induced selloff as the share of bonds fell back to 20% now, Hegazy said.

The ministry issued its first two-year Treasury bonds Monday and will debut 15-year debt next week, signaling a return to its plans, Hegazy said.

Floating bonds are also in the pipeline, but the timing “depends on market conditions.”

Egypt Revives Debt Strategy With Plans for Eurobonds, First Sukuk

Egypt is in an advanced stage of issuing a $500 million green bond and awaiting final approvals to sell Shariah-compliant debt, Hegazy said.

The targets are mainly Islamic banks and funds in Egypt and the Gulf, which he said “keep asking us about Islamic products.”

“Sukuk will help us diversify our investor base as well as reduce the borrowing cost given that yields on sukuk are less than bonds,” Hegazy said.

©2020 Bloomberg L.P.

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