In a bid to diversify its sources of finance, the government issued Egypt’s first sukuk (Islamic bonds) offering of $1.5 billion last week. The offering was fourfold oversubscribed, wetting appetites for more Sharia-compliant offerings, with the Ministry of Finance also revealing three-year plans to raise a further $5 billion through this kind of bonds.

The high demand for the offering stems from its high yield of 11 per cent. According to sources speaking to Al-Ahram Weekly, the aim was for a final yield averaging 5.6 per cent, but it was raised in line with increased interest rates after the outbreak of the Russia-Ukraine war.

Like other emerging markets, Egypt is facing a jump in the cost of borrowing after central banks worldwide led by the US Federal Reserve hiked interest rates to rein in runaway inflation.

The international ratings agency Moody’s assigned a B3 rating to a potential $5 billion sukuk issuance by the Finance Ministry’s sukuk company on 14 February. The rating reflects Moody’s downgrading of Egypt’s sovereign credit rating in early February due to “reduced external buffers”. This means that the country’s sovereign debt is considered to be of higher risk, and this needs to be covered by offering higher yields on its bonds.

The planned issue will be used to purchase the usufruct rights to eligible real-estate assets to finance investment and development projects included in the economic and social development plans in the state’s general budget, Moody’s wrote. However, it was revealed that last week’s offering will be used to repay $1.25 billion in five-year Eurobonds, which carried a fixed interest rate of 5.577 per cent and matured on 21 February.

The Ministry of Finance is planning to raise the offering from $1.5 to $2 billion and is scheduled to announce a fresh offering in June. It is also set to issue $500 million CNY-denominated so-called panda bonds in the first quarter of 2023-24, said Nevin Mansour, an advisor to the deputy finance minister.

The plan to issue sukuk bonds has been in the pipeline since 2019 but was put off owing to the coronavirus pandemic.

Minister of Finance Mohamed Maait said sovereign sukuk bonds are part of Egypt’s plan to diversify the investor base in government securities. The Sharia-compliant bonds will help attract a fresh base of investors, provide additional funding to government capital markets, reduce the cost of financing the state budget deficit, and extend the average life of the debt portfolio, he added.

Mohamed Ali Auf, managing director of the Abu Dhabi Islamic Bank, said there are $560 billion worth of sovereign sukuk bonds traded in the global markets, and it was about time that Egypt tapped some of this.

Egypt’s first sukuk bonds would be listed on the London Stock Exchange, with one Islamic bond trading at $100, he said. The higher than usual yield, according to Auf, was because of the difficult economic conditions on the global and local markets.

Eissa Fathi, head of a securities trading company, said that sukuk are the fastest alternative for the government to meet its obligations, especially since Moody’s downgrade of Egypt’s sovereign credit rating from B2 to B3 had made resorting to the international bond markets more costly.

He added that the sukuk bonds would attract new investors as they are compliant with Islamic Sharia Law.

Proceeds from selling the bonds are transferred to a Central Bank of Egypt (CBE) account, with the CBE giving the equivalent in the national currency to the Finance Ministry. The CBE uses the original amount to pay off debts or back the foreign-exchange reserves.

Sayed Abdel-Fadil, head of the Central Department for Financing at Egypt’s Financial Supervisory Authority, said sukuk bonds have yields, not fixed interest rates. The announced 11 per cent yields are compliant with sukuk regulations and the provisions of Islamic Sharia, he said.

He said that there is a legal framework governing the use of the proceeds of sukuk and their issue by the state or private-sector companies. He expects the yields of the planned offerings to be used to finance national projects.

The Gulf markets are particularly interested in sukuk markets because they have large financial surpluses that can be used in new investment tools, Abdel-Fadil said.

* A version of this article appears in print in the 2 March, 2023 edition of Al-Ahram Weekly