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Tuesday, 30 March 2021

Egypt could be back on JP Morgan’s EM bonds index in 2H2021

Egypt is expected to secure a spot on JP Morgan’s emerging-market government bonds index in 2H2021, unlocking up to USD 4.8 bn in new inflows from passive funds that track the index, and potentially leading to a 5% EGP appreciation against the USD, Rand Merchant Bank economist Neville Mandimika told Reuters. This would end a decade of absence from the index, which Egypt was removed from in 2011 in the aftermath of the 25 January Revolution.

Why we’re eligible now: Egypt now has a combined nominal USD 28.2 bn in longer-term bonds maturing in over 2.5 years, which is the minimum maturity for inclusion in the index. The inclusion of its eligible debt instruments would give Egypt a 2% weighting in the index and divert a portion of around USD 240 bn of assets under management. It could also lead to a natural decrease in yields, which tend to drop an average 130 bps before inclusion, Mandimika said.

Egypt’s strong economic performance since the completion of the IMF reform program is another factor: The government has, since 2019, maintained consistent primary budget surpluses, and “paved the way for its debt-to-gross-domestic-product profile to compress,” Mandimika says. Egypt began implementing a comprehensive debt strategy last March, focusing on moving toward longer-term debt and prioritizing a long-term reduction in the debt-to-GDP, which stood at 86.1% at the end of the last fiscal year after having been above 100% before authorities started implementing the IMF-backed program in 2016.

Why is inclusion good for Egypt? Authorities have been working towards this goal for over two years in a bid to cut borrowing costs and boost inflows. Inclusion would add Egyptian bonds to a list of sovereign instruments gauged by leading investment banks to inform large index-tracking ETFs which invest in the entire EM debt market. The index is among the most popular benchmarks for bond performance and is widely used by money managers.

The ball’s in JPMorgan’s court now: Finance Minister Mohamed Maait told Bloomberg in December 2020 that the ministry had fulfilled nearly all of JPMorgan’s requirements, and was waiting to hear back from them, but we’ve heard nothing official from the ministry since then.

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