Egypt plans to raise as much as $1 billion by June from the sale of its first Islamic bonds as the government anticipates a return to political stability will soften the blow of five credit rating cuts.
The cabinet has completed a draft law to allow sukuk sales, incorporating revisions by the ruling Freedom and Justice Party and Shariah scholar Hussein Hamed Hassan, said Ahmed El-Naggar, adviser to Finance Minister El-Morsi El-Sayyed Hegazi. Officials have compiled a list of about 25 projects that could be used as assets to back future sales, El-Naggar said in a phone interview on Feb. 21 from Cairo.
“The international market is waiting for Egypt’s sukuk sale,” said El-Naggar, an FJP official who became a ministerial adviser after the ouster of Finance Minister Momtaz El-Saieed in a cabinet reshuffle last month. “I hope to start with two sales, one for domestic investors and one abroad.”
Chaos that accompanied the 2011 uprising that toppled President Hosni Mubarak has shut Egypt out of international debt markets as Standard & Poor’s lowered the country’s credit rating to B-, the same non-investment grade as Greece and Pakistan. The government last sold dollar bonds in 2010, raising $1.5 billion in 10-year and 30-year notes. The yield on the $1 billion debt due April 2020 jumped 102 basis points this year to 7.06 percent as of 3:08 p.m. in Cairo.
Bumpy Transition
Bouts of violence and political unrest that have disrupted Egypt’s transition to democracy have delayed attempts to boost the Shariah-compliant financial industry in the most populous Arab country. The upper house of parliament, which is dominated by the FJP, is expected to debate the draft sukuk law this week, El-Naggar said. President Mohamed Mursi, an Islamist, plans to hold elections for the lower house in April and has ordered the new assembly to convene in July.
Tunisia and Morocco are also seeking to tap Islamic investors after borrowing costs plunged. The average yield on sovereign bonds that comply with the religion’s ban on interest tumbled 126 basis points, or 1.26 percentage points, last year to 2.65 percent, according to the HSBC/NASDAQ Dubai Sovereign US Dollar Sukuk Index. The yield rose 19 basis points this year to 2.84 percent on Feb. 22, the data show.
Soccer Fans
Global sukuk sales are set to surpass last year’s record of $46 billion, led by issuance from the Gulf Cooperation Council, Mohammed Dawood, Dubai-based managing director of debt capital markets at HSBC Holdings Plc, said in an interview in Dubai this month.
Egypt’s borrowing plans come against the backdrop of increasing opposition to Mursi by some ultra-conservative Salafis, political parties calling for a secular state and soccer-fan groups seeking the removal of the public prosecutor in connection to fatal violence in Port Said last year.
The crisis has erased most of the gains in Egyptian bonds since Mursi’s election in June. The premium investors demand to hold Egypt’s dollar-denominated 2020 debt over the benchmark dollar swap rate, or the z-spread, surged 22 basis points last week to 553, according to data compiled by Bloomberg. It was at 562 today, the highest level since June 25, a day after after Mursi was declared winner in the presidential election.
Credit Risk
The cost of insuring Egypt’s dollar-denominated debt for five years soared 176 basis points over the past month to 635, the world’s second-worst performer after Argentina, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
The swaps suggest that “Egypt will have to pay a lot to issue the sukuk,” said Tariq Qaqish, deputy head of asset management at Dubai-based Al Mal Capital PSC. “On a macro level, things are not looking that good. However, this might change if we see political stability which would result in improvement in the economy.”
Egyptian officials held a seven-hour meeting at the Finance Ministry on Feb. 20 to discuss issues including how to secure the best pricing for the first sale, El-Naggar said. The size of the first issuance will be between $500 million to $1 billion, he said.
2013 Growth
The nation’s economic growth slowed in the last quarter of 2012 to 2.2 percent from 2.6 percent in the previous three months and investment declined, according to government data. Expansion may reach 3 percent this year, according to the median estimate of 11 analysts on Bloomberg.
Sovereign dollar sukuk sales in the Arab world are limited to Dubai, Qatar, Bahrain and the emirate of Ras Al-Khaimah, according to data compiled by Bloomberg. The yield on Dubai’s 6.396 percent notes due 2014 is little changed this year at 2.12 percent, the data show. The spread between the bonds and Malaysia’s 3.928 percent sukuk due June 2015 was 73 basis points today, down from 80 at the end of 2012.
The Egyptian government is working to amend the nation’s accounting standards to comply with the Accounting & Auditing Organization, a Bahrain-based body known as AAOIFI, El-Naggar said. The government is also preparing to resume talks with the International Monetary Fund for a $4.8 billion loan to help reduce borrowing costs to finance the biggest budget deficit in the Middle East.
The sukuk sale is going through regardless of IMF talks, El-Naggar said. “We are taking the loan into our consideration but in the end the sukuk issue is separate,” he said.
(Bloomberg / 25 Feb 2013)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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