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Wednesday, 2 February 2022

FinMin’s Ahmed Kouchouk mitigating the Fed, our first sovereign sukuk and how we got back onto the JPMorgan bond index

EXCLUSIVE– How our inclusion in the JPMorgan indices will help with us manage our debt as countries around the world raise key interest rates: On the face of it, the timing of Egypt rejoining JPMorgan’s emerging-market bond index might not have been ideal, considering the US Federal Reserve’s push to raise interest rates this year — potentially driving inflows out of emerging markets. Vice Minister of Finance Ahmed Kouchouk would argue differently: Not only is joining the indices a milestone in our debt diversification and reduction strategy, our inclusion and the message this sends to investors would help cushion Egypt from the worst of any potential outflows.

We spoke with Kouchouk on how the inclusion is a crucial element of our debt strategy, what it took to get us back in the index, what the government plans to do to mitigate the impact of a high global interest rate environment, and the timing of some key debt issuances we have planned this year.

Below are edited excerpts of our conversation:

Joining JPMorgan’s emerging-market bond index at the weight at which we did was a crucial milestone in our debt management strategy — and one that has been in the works for three years now. When the Finance Ministry was drawing up its debt reduction plan, it knew that the plan would rest on three objectives: diversifying our borrowing, extending our debt profile away from short-term borrowing and into long-term borrowing, and bringing down our debt-to-GDP ratio.

Joining the index would directly help accomplish the first two goals and would help drive us into the third as it would give us access and raise our exposure to more sophisticated institutional investors who are looking for long-term fixed-income investments, Kouchouk told us. It would also allow us to generate more demand for longer tenor debt offerings, he added.

What kind of long-term investor are we looking at? “We are starting to see interest from big pension funds from Western Europe and the US,” some of whom want to buy into our debt for the first time, Kouchouk revealed. “We’re talking huge investors,” with asset managers that manage USD tns. “We’ve never seen fixed income investors of this size buy into our debt before,” he said.

Step #1 to getting back on the index — more liquidity in the market: Egypt’s debt sales needed to be bigger in terms of size, tenors and frequency, Kouchouk said. When the ministry first entered talks with JP Morgan, our local currency sales of T-bonds were on average in the neighborhood of EGP 500 mn per offering. JP Morgan inclusion requirements meant that number needed to be raised to around the EGP 5-7 bn mark. They also wanted to see additional trading on the bonds to ensure adequate trading liquidity, he noted.

Step #2 to getting back on the index — engaging with investors: Next up, the Finance Ministry had to set up dedicated teams that liaise with investors in Egypt’s debt to help troubleshoot on issues such as dual taxation and tax clearance, as well as setting up an investor relations unit that would help communicate any shifts in the market and to reassure them about their investments, Kouchouk noted.

Good implementation on those fonts got Egypt onto the index watch list in April, which is effectively a monitor tool to gauge the consistency of our bond sales, the performance of our bonds, and meeting our other requirements for inclusion. In the end: 90% of investors surveyed independently by JP Morgan voted to include Egypt’s bonds.

Would a series of Fed rate hikes offset any potential gains from joining the index? The Fed raising interest rates will undoubtedly have an impact on all emerging markets and has the potential to drive outflows to more developed markets, Kouchouk warned. He points out that the USD 26 bn in EGP bonds in the indices have an average yield of around 14.9% (with an average net yield of around 13%). This is among the highest of any emerging markets and so the impact would not be as pronounced as on other EMs. “It is still too early to measure what impact such a decision would have on our yields, but we hope that they will continue to remain at manageable levels in light of positive macro fiscal developments delivered by the Finance Ministry and the government,” he added. These should also improve risk premium by investors, he notes.

The Finance Ministry can only react to market-changing global conditions by sticking to the strategy at hand, says Kouchouk. This includes delivering solid macro indicators and meeting our targets for the primary balance (a surplus of 1.5% of GDP in FY2021-22), the overall budget deficit (6.7% of GDP) and lowering the debt-to-GDP ratio to below 90% by the end of the current fiscal year. “The Finance Ministry has been and would remain committed to meet its annual targets despite external headwinds,” he added.

Almost as crucially, we must continue to be proactive with investors to manage the risk perception, Kouchouk tells us. We must constantly engage with them to remind them that Egypt is an outlier among emerging markets.

As far as global foreign currency denominated debt is concerned, the Finance Ministry’s baseline scenario sees us issuing at a similar pace as in previous years (an average of USD 5 bn), Kouchouk said. He notes, however, that it is still too early to announce a target for issuances as the FY2022-23 budget is still being worked on, and that would of course also be dependent on market conditions. Last year, 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.

Having said that, Kouchouk still expects our maiden sovereign sukuk issuance to take place by June 2022. The Finance Ministry also recently announced it is looking to issue EGP 500 mn worth of JPY-denominated Samurai bonds by the end of June.

FinMin is also looking to diversify our bond offerings with development and ESG bonds, and is working on preparing for a likely sale some time in the next fiscal year, he says.

Why is our debt still not Euroclearable? It is simply a matter of procedure, he tells us. Representatives of the Belgian clearinghouse must arrive here and inspect our readiness to become Euroclearable and address any outstanding issues before we look to sign on. Last we heard, the government expects to finalize an agreement with the Belgian clearinghouse to clear local debt in Europe during the second half of 2022.

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