Going Japanese

Doaa A. Moneim, Tuesday 29 Mar 2022

Egypt is borrowing in Japanese yen in an effort to diversify its foreign currency resources, writes Doaa A. Moneim

Going Japanese
The Tokyo Stock Exchange

Responding to the ongoing economic challenges caused by the Covid-19 pandemic and aggravated by the Ukraine-Russia conflict, Egypt is aiming to diversify its financial resources to make available the required liquidity for the domestic market and curb its elevated debt-to-GDP ratio.

The Ministry of Finance last week issued Egypt’s first yen-dominated bonds with a total value of $500 million.

Issued in the Japanese market and governed by Japanese regulations, the bonds are called Samurai bonds. They help governments to sell debt in currencies other than the euro and the US dollar and hedge against risks in foreign-exchange fluctuations.

Such risks have become a real threat for the emerging economies due to the repercussions of the pandemic and the war in Ukraine.

The idea of issuing Samurai bonds first emerged in 2019, when the Ministry of Finance said it planned to make a $2 billion offering. The plan was shelved due to the outbreak of the Covid-19 pandemic.

The present offering is guaranteed by the Bank of Japan and covered by Sumitomo Mitsui, a Japanese state-run insurance company, and Nippon Export and Investment Insurance. The bonds have a five-year maturity and carry an annual coupon of 0.85 per cent, according to the Ministry of Finance.

Speaking to Al-Ahram Weekly, Deputy Finance Minister for Financial Policies Ahmed Kouchok said the offering was a milestone transaction that will enable Egypt to tap the Japanese market and widen its investor base.

“Sumitomo Mitsui Banking Corporation [SMBC] acted as the guarantor for both the principal and interest. This guarantee, along with strong investor demand, enabled the Finance Ministry to issue the bonds with an annual coupon of 0.85 per cent,” he explained.

He added that the issue represents the first Samurai transaction issued in Middle East and North Africa (MENA) region sovereign bonds since 2014 and is part of Finance Ministry plans to diversify Egypt’s debt instruments by targeting different currencies, markets, and investors.

“Issuing such bonds will support the Egyptian economy against the current global economic crisis,” banking expert and advisory member of the Egyptian Centre for Economic and Strategic Studies Ahmed Shawki told the Weekly.

Shawki explained that the proceeds of the bonds will enhance Egypt’s foreign-exchange reserves and provide the exchange necessary to provide strategic and basic commodities in the local market.

They are also a critical instrument to confront foreign investment outflows because of the Russian war in Ukraine and interest rate hikes. According to Bloomberg, almost $15 billion fled the country in the two weeks following the outbreak of the war.

On 16 March, the US Federal Reserve raised interest rates by 0.25 per cent, pointing to six more raises to be applied through the end of 2022 to reach 2.8 per cent.

The Central Bank of Egypt (CBE) Monetary Policy Committee hiked its key interest rates in an unscheduled meeting held in March by one per cent, the first rise in five years.

“Egypt’s Samurai bonds reflect the international financial institutions’ confidence in the Egyptian economy and its ability to repay the country’s financial obligations,” Shawki said.

He added that the government needs to focus more on finding ways to increase foreign direct investment (FDI) and raise its share in the country’s investment portfolio as well as alleviate the internal debt burdens on the budget.

With a five-year maturity, the issue complies with ministry plans to extend Egypt’s debt maturity, according to Kouchok.

In collaboration with the International Monetary Fund (IMF), Egypt has been embarking on a medium-term debt-management strategy with a key mission of reducing debt services, prolonging debt maturities, and expanding the investor base.

The external debt trajectory will be set in accordance with expected cash inflows with a ceiling of 37 per cent of GDP, which will also be put on a downward path, according to the Finance Ministry.

Moreover, the strategy targets lowering the public debt-to-GDP ratio to about 70 per cent over the coming four years, as well as putting a cap on loans obtained through international bodies over the same period.

According to recent data published by the CBE, Egypt’s external debt declined slightly in September, the end of the first quarter of the current fiscal year, to post $137.4 billion, down from the $137.8 billion posted at the end of June.

The government plans to bring Egypt’s overall debt-to-GDP ratio below 90 per cent by June 2022 and down to 85 per cent over the coming three years, down from 108 per cent in June 2017.

As a result of the pandemic, Egypt’s debt-to-GDP ratio hit 91.4 per cent in 2021, according to the IMF. Egypt is officially in talks with the IMF to help design a new programme for the country to address the impacts of the global crisis on its economy.

“A set of macroeconomic and structural policy measures would alleviate the impact of this shock on the Egyptian economy, protect the vulnerable, and keep Egypt’s resilience and medium-term growth prospects,” said IMF Mission Chief for Egypt Celine Allard last week.

*A version of this article appears in print in the 31 March, 2022 edition of Al-Ahram Weekly.

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