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Tuesday, 28 December 2021

Covid-era debt trends didn’t quite keep up in 2021

Just as the pandemic stuck with us this year, heavy borrowing was another theme that spilled over to 2021 from 2020. The Central Bank of Egypt (CBE) has left rates on hold since November 2020, while globally, it’s been a year of historically-low interest rates. The government continued to borrow from abroad, this time to plug the fiscal deficit left behind by its historic stimulus program from 2020. Corporate borrowing still kept on rolling this year, albeit at a slower pace than last year.

Egypt tapped international debt markets twice this year, looking to capitalize on the low-rate environment globally to take on new debt at a lower cost. The Finance Ministry sold USD 6.75 bn in USD-denominated eurobonds across the two issuances it took to market in February and September, both of which saw strong demand from foreign investors.

More local debt was in the hands of foreign investors than ever before: Foreign holdings of EGP-denominated debt swelled to a record USD 34 bn in September as Egyptian rates continued to attract foreign investors searching for yield. Portfolio flows have stepped in to help fill the gap in the country’s balance of payments left by the collapse in tourism revenues. The downside: Egypt now has high debt servicing costs that could make us more vulnerable to the whims of international capital flows.

We also got a foreign currency boost from a new SDR allocation from the IMF, which came into effect in August. Egypt’s share of a record USD 650 bn allocation of special drawing rights (SDRs) globally was the equivalent of around USD 2.8 bn. SDRs are a kind of international reserve currency or asset designed to act as a supplement to IMF member countries’ reserves.

The ministry also turned to the Gulf for more money: A syndicate of mostly Gulf lenders has topped up a USD 2 bn loan taken out in 2020 to shore up public finances through the covid crisis. Led by First Abu Dhabi Bank and Emirates NBD, the group agreed this year to lend the government another USD 3 bn, just a month or two after it finished paying off last year’s 12-month loan.

Where does this leave our external debt position? The pandemic has not been kind to our debt position, forcing the government to add another USD 16 bn to its external liabilities in 2020 as it sought to shore up the economy and plug revenue shortfalls, in addition to covering the costs of its planned infrastructure projects. 2021 has largely carried on where 2020 left off: The government borrowed USD 8.7 bn during the first half of the calendar year, raising our external debt-to-GDP to 34.2% at the end of 2Q2021, from 32.1% at the end of 1Q2021, according to CBE figures (pdf). Long-term debt accounted for 90% of our total external debt by the end of the second quarter of the year, according to CBE figures. Out of our USD 137.9 bn in external debt, USD 124.1 bn was long-term debt, while USD 13.7 bn was short-term.

It was another year of firsts on the green bond front, as CIB became the first to issue corporate green bonds in the country’s history. The private sector bank sold USD 100 mn of the climate-linked securities to the International Finance Corporation (IFC) in August, the proceeds of which are being earmarked to finance green buildings. This includes the bank’s new headquarters in the new capital, which will obtain a green building certificate.

This is the second year running Egypt has been the trailblazer for green bonds in the region: Egypt became the first country in the Middle East and North Africa region to issue sovereign green bonds last year, selling bonds worth USD 750 mn to foreign investors.

But 2021 was not exactly the year that corporate green bonds “took off.” CIB aside, we’ve heard next to nothing from other companies (private and public sector alike) about plans to issue green debt of their own.

The first steps were taken to introduce a wider range of ethical investments to Egypt’s capital markets: Investors who want their money to produce socially beneficial outcomes will soon have more options after regulators approved amendments that would allow companies to issue debt linked to everything from female empowerment to sustainable development. A wide range of environmental, social and governance (ESG) bonds would allow companies to turn to the debt markets to fund projects that deliver certain social or environmental outcomes (think: higher energy efficiency, greater workplace diversity, more affordable housing). There’s no word yet on when companies will be able to issue these securities, nor have authorities published the criteria for determining what counts as an ESG bond, so this is something to keep our eyes on as we head into 2022.

We moved closer to our first-ever sovereign sukuk sale: The long-awaited Sovereign Sukuk Act was passed by the House, allowing the government to begin working on its maiden sukuk issuance. Finance Minister Mohamed Maait has said that we can expect the sale to go ahead in the first half of 2022, though there’s currently no word on how much the government plans to raise in the process.

But corporate sukuk issuance was weak: Contact Financial was the only company to sell the sharia-compliant securities this year, closing a EGP 2.5 bn issuance in July.

The securitized bond market slowed down from last year, but a lot of 2020’s momentum was carried over into the new year. According to our records, a total of 14 issuances worth a combined EGP 12.63 bn went to market. This is a little over half of the EGP 22.1 bn raised last year and the EGP 22 bn raised in 2019. That being said, the year got off to a roaring start, with CI Capital closing a large EGP 2.7 bn sale, followed by another EGP 2 bn securitized bond sale from GB Lease. Three other issuances went to market in January: EFG Hermes closed a EGP 700 mn sale of securitized bonds on behalf of four Amer Group companies and Omar Amer’s mortgage lender Qasatli; Talaat Moustafa Group closed an EGP 870 mn securitized bond issuance; and Arabia Investments Holding’s consumer finance subsidiary Rawaj sold EGP 308 mn securitized bonds. The momentum petered out over the following months, before picking up again a little over the summer, but January remained the most active month for these issuances. CI Capital’s sale also remained the largest of the year.

2022 could follow a similar pattern of kicking off the year with a boom in securitized bond issuances, as the FRA said earlier this week (pdf) that it will approve before the year is out 11 new sales worth a combined EGP 11.5 bn. The regulator gave no indicator of which companies will be issuing the bonds, or when they could go to market. The National Bank of Egypt’s Al Ahly Leasing is planning to take its first securitized offering to market with a EGP 700 mn securitized bond sale, according to unconfirmed press reports out earlier this week.

Steps were taken towards introducing a new type of securitization to the Egyptian market after cabinet approved proposals to allow companies to securitize off-balance sheet cashflows. This would potentially open up securitization to a wider range of sectors such as utilities, telecoms and healthcare. However, we’re still yet to hear about when authorities plan to make so-called “future flow securitization” legit in Egypt.

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