At a time when governments of both poor and rich countries as well as many corporates are suffering from the economic effects of the Covid-19 pandemic, more means to finance their spending needs are being sought through borrowing.
Green bonds, being bonds issued to finance climate-related or environmentally friendly projects, as well as sukuks, or Islamic Sharia-compliant bonds, are making the headlines in Egypt with the news of the oversubscription of Egypt’s first-ever green bond issue being pointed to by the Ministry of Finance and the Talaat Moustafa Group’s sukuk issue, the first in Egypt, also having its debut on the local stock market last week.
The two new financing measures have come as other sources of traditional financing are being exhausted. Resorting to international financial organisations like the World Bank and the International Monetary Fund (IMF) has noticeably increased since the outbreak of the pandemic, with more than 70 countries, Egypt included, applying for rapid credit facilities to face coronavirus-induced economic challenges.
However, most of these facilities are linked to reform conditions that come at a social cost. And while issuing bonds locally or internationally is a means of raising funds that Egypt has been using for a while, the high yields it has had to pay investors in these instruments has also added much to the country’s fiscal burdens.
International investors have pumped billions of dollars into Egypt’s sovereign debt market since the devaluation of the Egyptian pound in 2016. The overall value of foreign holdings of Egyptian sovereign bills and bonds rose to $16.9 billion by the end of August from $14.1 billion a month earlier. Egypt pays the second-highest yield on sovereign bills and bonds among the world’s emerging markets.
The country has also been tapping the international debt markets through Eurobond issues, the latest of which was in May when it sold $5 billion worth of bonds, its largest-ever issue. Overall debt-servicing is now eating up more than 20 per cent of Egypt’s state revenues.
Accordingly, the government is working on a new funding strategy aimed at locking in new sources of financing and broadening its investor base, explaining its interest in the newly adopted green and sukuk bonds.
The $750 million green bond issue that will be used to finance environmentally friendly and renewable energy projects was five times oversubscribed. The sale had “put Egypt on the map of sustainable financing”, the Finance Ministry said, adding that interested buyers had included new investor bases from Europe, the US, East Asia, and the Middle East, as well as asset managers and pension, investment, and insurance funds.
The ministry said that such diversified, long-term, and high-quality investors would reduce the price volatility of the bonds.
The high demand is another manifestation of rising global interest in green investments. According to the US financial service Bloomberg, the value of assets covered by the US Morningstar Sustainability Index, which measures a company’s compliance with environmental and social regulations, have doubled to $250 billion in the past three years.
Egypt is riding this wave, as it is working on a $1.9 billion portfolio of potential green projects. Egyptian companies will soon join with the Commercial International Bank (CIB) planning a green bond issuance next month, and the International Finance Corporation (IFC) is set to snatch the first tranche of the $65 million five-year bonds offering.
The Ministry of Finance is also planning its first sukuk, or Islamic bonds, issue in both the local and international markets during the current fiscal year. “Sukuk will help us diversify our investor base as well as reduce borrowing costs, given that yields on sukuk are less than on [regular] bonds,” Mohamed Hegazi, head of the Finance Ministry’s debt-management unit, told Bloomberg.
The investor targets are mainly Islamic banks and funds in Egypt and the Gulf, which Hegazi said “keep asking us about Islamic products”.
According to the information service Investopedia, sukuk is a Sharia-compliant bond-like instruments used in Islamic finance. Since the traditional interest-paying bond structure is not thought to be permissible under Islamic Law, the issuer of a sukuk essentially sells the investor a certificate, and then uses the proceeds to purchase an asset that the investor has direct partial ownership interest in.
Sukuk holders thus do not receive interest payments, but instead they receive a portion of the earnings generated by the associated asset. The issuer must also make a contractual promise to buy back the bond at a future date at par value.
Local corporations have already tried their luck in this market. The Talaat Moustafa Group (TMG), the leading real-estate developer, is the first Egyptian company to have listed sukuk traded on the local stock exchange.
Its exchange-listing committee two weeks ago approved the LE2 billion listing for the Arab Company for Projects and Urban Development, a TMG subsidiary. The decision came as part of TMG’s plans to issue LE4.5 to LE5 billion sukuks to finance its real-estate projects.
The sukuk offering was 2.5 times oversubscribed in April during the private placement, and the state-owned Banque Misr, Banque du Caire, and Suez Canal Bank alone cornered 97 per cent of the issue. The sukuk has a tenor of five years, is open for trading, is not transferable to shares, and each will have a nominal value of LE100.
The proceeds of the subscription will be used to complete the Madinaty open-air mall and to improve the market value of the mall by the time of inauguration to LE8.5 billion. Investors will receive periodic payments based on the profits generated by the mall. The sukuk is now publicly traded.
More sukuk offerings worth a combined LE4.5 billion are expected to go to market this year, including Sarwa Capital’s planned LE2.5 billion issue and another LE2 billion issue by the Amer Group.
*A version of this article appears in print in the 8 October, 2020 edition of Al-Ahram Weekly