What is the J.P. Morgan Government Bond Index-Emerging Markets investment index?

The J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) index is a comprehensive emerging market debt benchmark that tracks bonds issued by emerging market governments in the local currency. The index was launched in June 2005 and is the first comprehensive global emerging market index. It includes 18 emerging economies.

Why is it important for a country to be included in an international index?

According to a study by the International Monetary Fund (IMF), portfolio flows to emerging market local bond markets have traditionally been much more synchronised for countries in a benchmark index than those that were not in the index. The study, titled “Benchmark-Driven Investments in Bonds in Emerging Markets: Taking Stock”, notes that investment decisions by more than 70 per cent of institutional investors and investment funds are based on the country weights in a benchmark, which means they allocate more funds to countries included in the indices. The higher the weighting, the more are the allocations. Moreover, as they are directed by the weighting in the index, capital flows to any country are less sensitive to domestic economic developments, which may reduce outflows in response to domestic shocks.

The IMF estimates the size of benchmark-driven investments in local emerging market bond markets at having been around $300 billion at the end of 2019 before the Covid-19 pandemic began in early 2020.

Has Egypt been included in the index?

Egypt’s sovereign bonds were given clearance to join the J.P. Morgan’s GBI-EM investment index starting on 31 January 2022, according to a note issued by the bank last week.

The country has also been listed in the index before, but it was delisted in the aftermath of the 25 January uprising due to ailing economic conditions. On 9 April, J.P. Morgan placed Egypt on its Index Watch Positive, which meant possible inclusion in the index in a six-month period.

What makes Egypt eligible to be relisted now?

Commenting on the decision to put Egypt on the watch list in April, one analyst at the Rand Merchant Bank (RMB) told Reuters that “Egypt has done unusually well in improving its macroeconomic fundamentals after finishing an International Monetary Fund programme in 2019 and has had consistent primary budget surpluses that have paved the way for its debt-to-gross-domestic-product profile to compress.”

Deputy Finance Minister Niveen Mansour told the local press earlier this week that the ministry has been in talks with J.P. Morgan for the last three years to update it on developments in the government bond market. These years witnessed the government implementing a plan extending the duration of public debt and increasing foreign investors’ participation in sovereign issues while increasing the value of the issues. Egypt currently has a combined nominal amount of $28.2 billion in eligible bonds maturing in more than 2.5 years, the minimum amount for inclusion in the index.

What will happen next January?

Around 14 Egyptian-pound denominated government bonds with an estimated total value of $26 billion will be included in the benchmark index. The bonds have an average yield of 14.9 per cent and a duration of 2.9 years. Egypt will then have an estimated weight of 1.85 per cent in the index, and it will be one of only two emerging markets in the Middle East and North Africa (MENA) region to be included. South Africa is also included in the index. Indonesia, Mexico, Thailand, and Brazil are all expected to see large declines in their weightings when Egypt is included in the index.

According to Mansour, the inclusion will also pave the way for Egypt to be added to J.P. Morgan’s Environment and Governance index based on green-bond issuance by the end of January 2022. With a weighting of 1.14 per cent in this index, Egypt will be put on the map of sustainable economies. The country last year sold $750 million in five-year green bonds, making it the first country to offer such bonds in the MENA region.

What does inclusion mean for the local economy?

The inclusion will make Egypt’s sovereign bonds more accessible to foreign investors and will increase foreign currency portfolio inflows to the country by around $4.4 billion annually, according to Minister of Finance Mohamed Maait. Egypt’s inflows of foreign investments in treasuries hovered at around $30 billion in August, a rebound from their decline to $7 billion in May 2020 due to the Covid-19 pandemic.

If the expected increase in portfolio investments is accompanied by further stability or an increase in other sources of hard currency, such as tourism, foreign direct investment, and exports, the Egyptian pound exchange rate against the dollar should stabilise and might even see a revaluation of up to five per cent, according to RMB.

Inclusion in the index also implies that the government’s future bond issues will be considered to be of lower risk and thus could lead to a lowering of the interest rates the state pays on these issues, lightening the burden on government expenditure. The news of Egypt’s relisting in the J.P. Morgan index comes as Egypt is in final talks with the Belgium-based clearing house Euroclear to register local debt issues with it and thus make local debt more accessible to foreign investors. At present they are only able to enter the market through a few local banks.

*A version of this article appears in print in the 21 October, 2021 edition of Al-Ahram Weekly