By Hossam Mounir
Last Thursday, the Egyptian government sold international 10-year bonds worth $1.5bn with a revenue of 6%.
“The 6% revenue is very convenient for Egypt and investors in global capital markets as well,” said Tamer Youssef, head of the treasury and capital markets sector in a foreign bank working in the domestic market.
“Global capital markets suffer from shaky confidence in the sovereign debt of countries, because of Greece’s crisis, which makes investors highly cautious when investing in government debt tools,” he added.
The arrangement of the issuance of the bonds that were sold was undertaken by BNP Paribas, Citigroup, J.P Morgan, Morgan Stanley and Natixis, he said.
“Egypt had issued bonds almost 12 years ago with a revenue of 8%, the dollar interest rate in global markets was 4%. Right now, the dollar interest rate is nearing zero, which could contribute to decreasing the interest rate on the new Egyptian bonds. However, Egypt’s status, which witnessed a decline in its credit status several times, and the fear from repeating Greece’s crisis, all lead to a rise of its revenue,” Youssef added.
Egypt has global bonds worth $3.750bn that were raised in previous years on the Luxembourg Stock Exchange. Among the bonds was one due next December, with a value of $1.250bn at an interest rate of 4.45%. The second bond is worth $1bn, due in July 2016 with an interest rate of 3.5%. The third is worth $1bn, due in April 2020 with an interest rate of 5.75%. The last is worth $500m, due in April 2040 with an interest rate of 6.875%, according to the Ministry of Finance.
The new bonds raised by the government were covered and are three times equivalent to the required value, where underwriting demands increased from the investors’ side to $4.5bn. This, according to Youssef, is due to two main reasons. The first is because Egyptian bonds represent a new investment tool for investors in the global capital markets in light of the decline of dollar investment revenues, and the slowdown of the global economy. The second reason is Egypt’s good reputation in foreign markets, where it is known for its commitment to pay debts on time.
Youssef said the Egyptian government’s ensuring some of these bonds despite their purpose, in addition to the issuance of positive reports from international rating institutions, all lead to this demand from investors’ side on investing in these bonds.
“Egypt’s return to the foreign markets to raise these bonds is a positive indicator,” said Youssef. “I expect that the price of an interestraised by the Egyptian government in the future will decline, especially with the economic and political reforms taking place currently.”
Mohsen Adel, a financial analyst and member of the presidency’s advisory council for economic development said: “The process of raising dollar bonds in the international market to get financing for vital projects is a good alternative, especially in the light of the improving conditions enhances the international confidence in the Egyptian ability to pay in the future.”
“This is a step that will support Egypt’s economic structure on the short term in the light of the weakness of foreign exchange and the state’s striving to implement investments during fiscal year 2015/2016, besides that these bonds will contribute to decreasing the pressure on the Egyptian pound,” said Adel.
“Disbursing these funds will give the country the opportunity to take a breath. Egypt needs to achieve quick independence for its economy by restoring the tourism flows and investments it attracted before. Such step can increase the investment confidence in the Egyptian economy, and the possibility of an improvement to the credit status in the future,” according to Adel.
Minister of Finance Hany Kadry Dimian said: “Raising these bonds achieves two goals besides obtaining required funding. The two goals are returning Egypt to the international bonds market after a five-year absence and maintaining its presence in international markets, in addition to finding a reference price that can be used to evaluate the Egyptian economy.”
Dimian added: “Raising these bonds is not an alternative for borrowing from international financial institutions, including the International Monetary Fund (IMF), due to the difference of their financial nature.”
Banking and economic expert Bassant Fahmy said the government must reveal its usage of the bonds’ money, especially in light of the presence of a parliament.
Fahmy added that the bonds’ being used to repay other government debts is fine, as it will not lead to an increase of foreign debt. In this case, it would be considered replacing a debt with another, however, if they will be used in consumer spending, then they should never have been raised in the first place.
The government did not have another alternative for raising these bonds if its plan was to pay off other debts, where international institutions like the World Bank or IMF do not grant loans to countries to pay their debts, according to Fahmy.