The Samurai bonds effect

Safeya Mounir , Thursday 7 Sep 2023

Egypt plans to issue Samurai bonds for the second time this week to meet its financial obligations with expert blessings.

The decision to issue Samurai bonds was driven by an urgent need for foreign currency
The decision to issue Samurai bonds was driven by an urgent need for foreign currency (photo: AFP)


The cabinet has approved the issuance of Samurai bonds in Japanese yen to a total value of $500 million and a maturity period of five years, a statement read this week. The move comes at a time when Egypt is grappling with a shortage of foreign currency to meet its financial obligations.

This is the second time that the country has issued Samurai bonds denominated in Japanese yen. The first time was in March 2022 in the first such move in the Middle East region. The value of the first offering was $500 million, or 60 billion yen at that time.

The step is meant to “diversify the base of international markets and investors to finance the general budget and to extend the average maturity of the debt,” the statement read.

Mohamed Hassan, investment funds director at Odin Investments, said the aim was to diversify the investor base and attract investors beyond just Europeans and Americans. He expected that the bonds would garner significant demand, similar to what was witnessed during the first offering.

The March 2022 issuance was underpinned by a credit guarantee from the Japanese bank Sumitomo Mitsui and government coverage from Nippon Export and Investment Insurance. The annual coupon rate was 0.85 per cent for a five-year period at a time when average annual coupon rates stood at 2.33 per cent for dollar-denominated bonds. 

Hani Geneina, chief economist and investment strategy analyst at Cairo Capital, said there had been plans to offer Panda bonds in the Chinese market. However, the strategy had shifted due to a decline in investor appetite and concerns over the real-estate crisis in China.

Furthermore, interest in Panda bonds paled in comparison to the favourable conditions offered by Japanese Samurai bonds, he noted, adding that the high issuance costs associated with Eurobonds, ranging from 18 to 20 per cent, made them less attractive.

He said that during the first offering last year, the cost was less than one per cent, and the Japanese Bank and government had covered the insurance cost for Japanese banks, guaranteeing the bonds against default risk until there was demand for them. 

However, this time the bonds are expected to come at a higher cost, particularly since Egypt has received a negative rating for payment risk from the international ratings agencies.

Finance Minister Mohamed Maait was quoted in press reports as stating that the offering process will be guaranteed by the Africa Finance Corporation. A manager from a Japanese institution he did not name will also be appointed.

Geneina said that the government’s decision to issue Samurai bonds was driven by an urgent need for foreign currency, given the scarcity of foreign exchange in the country. This has been exacerbated by the impending repayment of approximately $500 million in Eurobonds at the end of the year, along with a busy schedule of debt repayments next year totaling an estimated $25 billion.

Hassan believes that while there are risks associated with negative outlooks from certain ratings institutions, these are unlikely to hinder the success of this bond issuance. 

On Monday, Capital Intelligence Ratings upgraded its outlook for Egypt’s long-term debt in both local and foreign currency from negative to stable. However, it downgraded the debt rating from B+ to B while maintaining the rating for short-term debt at a B level. 

In a report on Friday, it attributed the downgrade to uncertainties stemming from increased external-financing risks for Egypt due to the country’s high external-financing needs and challenges in accessing capital markets at reasonable costs.

Capital Intelligence explained that its outlook was based on Egypt’s external debt being moderate at 43 per cent of GDP and mentioned the possibility of the country receiving support from the Gulf Cooperation Council (GCC) countries and the International Monetary Fund (IMF).

But this external support is contingent on certain conditions. GCC assistance is also tied to Egypt’s privatisation programme, which introduces uncertainty regarding the timing and level of inflows from the Gulf states, depending on the attractiveness of Egypt’s saleable assets

 Hassan expects interest in this Samurai bond offering to be higher than last time. It is likely that the interest rate will be in the vicinity of the last Eurobond offering, which was around nine per cent, he added. 

Geneina echoed the same sentiment, stating that he did not expect the return on this offering to be as low as one per cent. He attributed this expectation to Egypt’s being on the verge of receiving the second tranche of an IMF loan. The country is also expected to embark on further measures related to exchange-rate reforms and speed up its asset-management programme, he added.

The cabinet’s Information and Decision Support Centre released a document last week reporting that Egypt has attracted $5 billion in foreign direct investment by selling stakes in 13 government-owned companies. 

Despite these divestments, Hassan believes that there is a substantial gap of $27 billion between expected dollar revenues and the Government’s dues. He emphasised the need to “accelerate the exchange-rate liberalisation to enable the government to effectively implement the asset-management programme.”

* A version of this article appears in print in the 7 September, 2023 edition of Al-Ahram Weekly

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