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Thursday, 14 October 2021

The Egyptian government to look at markets again in Feb, March

EXCLUSIVE- How 2022 could be a big year for Egyptian debt, according to FinMin’s Ahmed Kouchouk: Through a mixture of stimulus funding, tax breaks, high interest rates, timely eurobond issuances, and the adoption of new debt instruments (namely, green bonds), Egypt was largely shielded from from the heaviest macroeconomic blows of the pandemic last year. While GDP growth came in at just 3.6% in 2020 according to the IMF (pdf, see page 40), we outpaced the global economy (where growth came in at negative 3.1% in 2020) and our emerging market peers (where GDP contracted 2.1% in 2020), according to data from the IMF (pdf).

The landscape in 2021 is changing, however, as the world attempts a post-pandemic recovery. High inflation globally and here at home is adding new impetus to policymakers’ push to taper stimulus and raise interest rates. The most prominent of which is the Fed, which hinted last month that it could start to wind down its asset-purchase program in November and raise interest rates as soon as next year. This puts emerging-market debt — including ours — at risk of becoming less attractive to foreign investors.

In Part 1 of our exclusive interview with Vice Minister of Finance Ahmed Kouchouk we take a look at how Egypt’s debt policy is adapting to the times. Below are edited excerpts of our conversation:

Look to 1Q2022 for our next eurobond sale: Egypt will be looking to tap international debt markets again in February or March 2022, Kouchouk tells us. This comes on the back of Egypt’s successful USD 3 bn eurobond sale last month, which was 3x oversubscribed. Egypt’s previous eurobond sale saw us net USD 3.75 bn and was 4x oversubscribed.

…and 2Q2022 for our maiden sovereign sukuk sale? While Kouchouk did not outright reveal the exact timing of when Egypt will kick off our first sovereign sukuk sale, he did state that we should be “procedurally” ready to go some time in 2Q2022. The government is currently on track to complete the procedures required to issue sovereign sukuks under the new Sovereign Sukuk Act, which include setting up the Sovereign Sukuk Company, a joint stock company to execute and manage sales.

Size of the issuance is still a mystery: Kouchouk did not disclose how big our sovereign sukuk issuance would be, but Finance Minister Mohamed Maait had hinted earlier this month that it could be in the range of USD 500 mn.

Green bonds are so last year. Hello, development bonds: “We are currently in talks with banks and international institutions to expand the framework of our sovereign green bonds into more comprehensive development bonds,” Kouchouk tells us. They include social bonds (bonds used to fund social infrastructure) and blue bonds (for water projects) and others. “We were encouraged to expand the framework after our success in the green debt market,” which has grown globally to USD 300-400 bn, he noted.

2022 could also likely be the year of the Fed’s stimulus tapering. What can we expect? Should the Fed decide to raise interest rates, it could trigger some volatility in global markets in the medium term, Kouchouk said.

Stay calm, and borrow on: Fiscally, we are in a good position to adapt to a decision by the US Federal Reserve and we should withstand any emerging market shocks and sellofs that could result from such a decision, Kouchouk noted. Our successful bond issuances, which have garnered plenty of interest from investors, have drawn enough inflows to cushion us from these shocks.

But we must remain vigilant: “We’re also constantly monitoring the potential effects of rising US rates on Egypt’s borrowing costs as well as any indicators on when the Fed might proceed with its tapering,” Kouchouk says. That is evident from the timing of last month’s eurobond issuance, which followed the Fed’s statement that it could wind down its asset-purchase program in November, he noted.

How strong is this cushion? Foreign holdings of Egypt’s debt currently sits at around USD 30 bn, Kouchouk tells us.

And we can look forward to more inflows as a result of our inclusion in the JP Morgan and FTSE Russell indices, he noted. (More on that below.)

When should we expect our debt to become ‘Euroclearable’? There is no specific date yet on when our bonds can be Euroclearable, Kouchouk says. Travel restrictions to Egypt had been the reason behind the hold up in the process. “For our part, we have completed all the procedures,” Kouchouk continued. Last month, it was reported that the Finance Ministry will likely miss its target of making local Egyptian debt “Euroclearable” by November. The government was originally expecting to have wrapped up technical discussions with Euroclear between September and November but according to statements made by Finance Minister Mohamed Maait yesterday it may now have to wait until 2022.

So, with all this borrowing, what does this mean for our debt reduction strategy? “We remain steadfast in reducing our debt service burden to 32% of our expenditures in the coming years from a current 38%,” Kouchouk notes.

IN PART 2, Kouchouk reveals what the Finance Ministry has in store for the private sector, from taxation policies, to export subsidies, to incentives and the Economic Reform Program 2.0. Be sure not to miss it.

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