Remaining robust

IFR SSA Special Report 2022
10 min read
David Rothnie

Egypt has called on a broad range of support and neighbours have rallied around as it navigates the impact of war in Ukraine. By David Rothnie.

Egypt is the world’s biggest importer of grain and Russia and Ukraine accounted for 80% of its imports last year, with the grain used to produce bread for feasting after Ramadan. Egypt’s subsidised bread programme covers two-thirds of the population.

Surging prices as a result of Russia’s invasion of Ukraine put additional upward pressure on inflation, which reached 8.8% year-on-year in February. The central bank allowed the currency to devalue by 14% and hiked its policy rate by 100bp to 9.25%.

Egypt’s reliance on Ukraine for grain imports and on tourism meant it was the weakest market in the MSCI emerging markets index during the first quarter, and it has borne the brunt of the emerging market sell-off, with foreign investors selling US$1.19bn of Egyptian treasury bonds in three days following the invasion.

With a little over a month until the end of the country’s fiscal year, Egypt’s sovereign issuance programme has faltered. Estimates for the fiscal year to June 30 2022 were in the range of US$5bn–$7bn and it is heading for a shortfall.

But its ability to fund in the domestic market, along with extensive support from its neighbours in the Gulf Cooperation Council, means the pressure is off.

“The first Eurobond maturity they have is not until early next year. There is no pressing need to issue because of the funding they are getting through the domestic market and the GCC. We’re not concerned whether they meet their issuance targets of US$7bn or not," said Raza Agha, head of emerging markets credit strategy at LGIM.

Egypt got off to a bright start when it hit the dollar market in September 2021 with a US$3bn trade to get ahead of the Federal Reserve’s plan to tighten monetary policy with rate increases and a tapering of its asset purchase programme.

The deal enjoyed a strong reception, with bookrunners Citigroup, First Abu Dhabi Bank, HSBC, JP Morgan and Standard Chartered attracting US$9bn of orders from 300 investors for a three-part 144A/Reg S offering that comprised a US$1.125bn six-year that printed with a yield of 5.8%, a US$1.125bn 12-year at 7.3% and a US$750m 30-year at 8.75%.

That marked its second dollar issuance of the calendar year, after it raised US$3.75bn in February 2021. Its September 2051 notes are yielding 12.6% but, as one of the biggest Eurobond issuers (along with Ghana) among emerging market Single B rated countries, Egypt suffers more than most in a risk-off environment.

“Egypt is a heavy issuer in the international bond markets and that makes its curve that much more volatile in risk-off environments," said Agha. "Before the September issuance, they used to trade more in line with the high-yield peers, but since then it’s been trading wide, and that’s a reflection of how much supply comes from Egypt on a regular basis. So, it’s not the economic fundamentals that you have to consider but also technical factors.”

Innovative reputation

As a sovereign bond issuer, the republic has combined heavy issuance with a reputation as an innovative borrower by diversifying its funding by type and currency with a series of firsts. In September 2020, Egypt's government became the first in the Middle East and North Africa to issue green bonds, when it printed a US$750m deal to finance environmentally friendly projects in the energy and transportation sectors.

In March 2022, it followed up by announcing plans for a debut sukuk offering, as well as more green bonds, to fund public projects.

The expanded green bond programme will help fund Egypt's plan for sustainable development as part of the "Egypt Vision 2030". The commitment also coincides with the country's hosting the COP27 United Nations Climate Change Conference in November 2022.

The finance ministry said it plans to double its contribution to government-backed green investments in the next financial year to 30% of all public investment, from 15% in the current year ending on June 30.

On March 24, Egypt raised ¥60bn (US$496m) from its debut Samurai bond offering in a private placement that priced at par with a 0.85% coupon.

The deal – again the first of its kind by a MENA borrower – was striking for the fact it was guaranteed by Japanese private bank Sumitomo Mitsui Banking Corp rather than Japan Bank for International Cooperation.

Bankers close to the government say the initial plan was for Egypt to make its debut in the sukuk market during the current fiscal year. But the outlook now looks uncertain and, with volatility pushing most borrowers to the sidelines, the dynamics have shifted.

“Those that have access don’t need to borrow and those that don’t have access do need to borrow,” said one MENA SSA banker.

Despite its woes, the banker says Egypt falls into the first category for a number of reasons. It has no bond refinancing needs until 2023, while it has pulled on a number of different levers to fund its gross external financing needs, which are estimated to be in the range of US$30bn–$35bn.

In frenetic days the followed the Russian invasion, the premium demanded by investors to hold Egypt’s dollar bonds over US Treasuries rose to a record high, while credit default swaps ballooned.

“Should market conditions continue to deteriorate, there is a reasonable possibility that Egypt may resort to IMF assistance for balance of payments financing purposes,” JP Morgan said in a report dated March 9.

IMF revisited

That proved to be the case and Egypt dusted off a playbook it has used before. Following the Russian invasion, Egypt devalued its currency. The last time took this move was in 2016 as a precursor to securing a US$12bn IMF loan secured to deal with a foreign currency crisis as it emerged from the political upheaval that followed its 2011 revolution. That, on top of an US$8bn loan received in 2020 to deal with the effects of the pandemic, made it biggest beneficiary of IMF assistance after Argentina.

Now it has returned to the IMF to mitigate the economic effect of the war. But, in advance of that, it teed up support from its neighbours in the GCC, which have provided around US$20bn of funding. First, it struck a deal Abu Dhabi’s sovereign wealth fund which saw the emirate invest US$2bn by buying state-held stakes in a number of companies, including Egypt’s largest listed bank.

This is the latest example of cooperation after the United Arab Emirates and Egypt set up a joint US$20bn platform three years ago to invest in a range of sectors and assets. On March 30, Saudi Arabia also provided around US$15bn, of which US$5bn was paid in the form of deposits to Egypt’s central bank.

Once the IMF can identify the timing of these disbursements, along with any additional sources of funding, it will plug gap so Egypt can meet it external financing needs.

Despite the war in Ukraine, the IMF estimated in April that Egypt’s fiscal deficit will amount to 6.8% of GDP in the coming year, down from 7.3% in 2021. Given the country’s reliance on grain imports, that may come as a surprise, but Egypt’s domestic wheat harvest will come between April and July, which, combined with existing reserves, means it has at least eight months of wheat supplies. Plus, perennial support from the GCC and bilateral loans from the US make the prospect of a default a distant one.

Analysts in JP Morgan’s emerging markets team said in a report on May 6 that these external support measures will reduce the pressure on the Central Bank of Egypt to tighten monetary policy further than it will already have to.

“We expect the CBE to continue its hiking cycle, delivering a cumulative 425bp in hikes by June '23. Combined with a backdrop of higher core rates, the duration outlook is quite negative. That said, a lot hinges on how much external support Egypt will be able to obtain, as the IMF and GCC umbrella reduces the risk for even larger tightening.”

According to S&P, overall commercial borrowing for 2022 in emerging markets will remain ahead of pre-pandemic levels, and will hit US$3.4trn-equivalent by year-end.

“The commercial debt of emerging markets in EMEA should end 2022 at 37% of combined GDP, up considerably from 31% in 2016,” it said in a report on April 5. The rise reflects an accumulation of shocks over the past six years, but S&P pointed to the high fiscal deficits in Egypt and Romania as particular factors.

“The IMF programme will be a very important anchor in terms of gross external financing needs," said Agha. "Right now, Egypt and most other Single B names don’t have access to bond markets. But Egypt doesn’t have major maturities in the Eurobond markets until early next year. Once the IMF programme is in place, this should improve Egypt’s issuance prospects in the markets again.”

Egypt may be navigating choppy waters but it has a firm hand on the tiller.

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