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Tuesday, 26 February 2013

Egypt: time for a sukuk

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Egypt’s continued political turmoil has made its life hard in international debt markets, but its government is hoping to secure new funds by less conventional means through the issue of the country’s first sovereign Islamic bonds.

According to a Bloomberg report, the government plans to raise up to $1bn by June through sukuk sales, with one for domestic investors and one for foreign investors.

“The international market is waiting for Egypt’s sukuk sale,” said Ahmed El-Naggar, adviser to Finance Minister El-Morsi El-Sayyed Hegazi, to Bloomberg. El-Naggar said in an interview with the news agency that the cabinet has finished a draft law to pave the way for the issuance, which would be debated in parliament this week.

Egypt needs funding desperately, with forex reserves at a 15-year low and the pound under pressure, as well uncertainty over a $4.8bn IMF deal. Meanwhile, continued political unrest has prompted multiple rating agency downgrades, most recently by Moody’s, which on February 12 cut Egypt from a B2 to B3 rating, six below investment grade.

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Demand for sukuk, which were first issued by the Malaysian government in 2000, grew strongly in 2012. Data from Dealogic shows total value of new Islamic bond issuance in 2012 to be $44.6bn, up from $33.1bn in 2011. Gulf Co-operation Council issuance accounted for just under half of the total, signifying the strong demand for the security among Egypt’s Arab neighbours.

With demand for sukuk expected to remain strong, they may provide an easier way for Egypt to raise money than western capital markets, Aliasgar Tambawala, an investment manager at Mashreq Capital, explained to beyondbrics.

“There is huge demand in the Middle East for sukuk”, he said. “The issue would likely be well subscribed within the region. The Saudis and Qataris are supporting Egypt already, so the regional demand is likely.”

At current market conditions Tambawala said he expects the Egyptian sukuk to trade with a yield of 6 to 6.5 per cent, but stressed that market conditions between now and the eventual issuance could change significantly.

Tambawala added that he expected the issuance to be primarily dollar denominated given the need to expand foreign exchange reserves. On Monday, the Egyptian government said it hopes to reach reserve levels of $19bn by the end of June, from their reported level as of January of $13.6bn.

He said that any issuance in unlikely prior to the settlement of a deal with the IMF on the stalled $4.8bn loan package. “Until something is sorted out on the IMF loan side, and until there is [political] stability, the likelihood of issuing something before that is low. They can’t pull off a dollar sukuk right away under current conditions, there is too much uncertainty. And for that to go away [Egypt] requires the IMF package.”

Seperately on Monday, the Egyptian government said that negotiations with the IMF would re-open in early March.

(Beyondrics / 26 Feb 2013)

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