beyondbrics

Egypt has had a tough time finding foreign finance since the overthrow of its former president, Hosni Mubarak. Its net foreign reserves have fallen by more than half since the start of 2011 and are getting dangerously low. Last month it asked the IMF for $3.2bn in emergency loans.

Now, a month after Islamist parties won more than two-thirds of seats in parliamentary elections, the country is turning to Islamic finance. An Islamic scholar familiar with Egypt’s plans told Reuters on Tuesday it was preparing to issue such bonds for the first time in a bid to raise around $2bn.

The scholar, Sheikh Hussein Hamid Hassan, has advised countries including Kazakhstan, Pakistan and Kyrgyzstan on Sharia matters. Though not an official adviser to the Egyptian government, he has been involved in talks on the possibility of an issue – and said the government would choose one of four structures he had proposed.

He told Reuters: ”The Egyptian government is convinced that a foreign currency sukuk [the Islamic equivalent of bonds] will fund the country’s development projects and can also bridge the gap in its currency reserves.”

He added: “The sukuk will be in dollars or euros or maybe a combination. It will be around $2bn, issued in several tranches targeting mainly Egyptians living outside Egypt… The date of issue is not final yet but Egypt is in urgent need of funding.”

Egypt’s net foreign reserves dropped by $1.8bn in January to $16.4 billion, taking the loss since January last year to 53 per cent. That’s largely down to a fall in tourism and a  perceived deterioration in the country’s investment climate – the EGX30, the benchmark equity index, lost more than half its value last year (but has recovered strongly in 2012).

The depletion of reserves has sparked fears of a currency crisis. So far, this has been avoided. Since the uprising against Mubarak, the Egyptian pound has fallen by less than 4 per cent against the US dollar. But with Egypt’s government also tackling a large budget deficit, analysts say something must be done urgently.

One economist told the FT this week that a deal with the IMF was “critical” and needed “yesterday” – but the IMF said it expected an agreement could take two or three months to achieve.

Islamic finance is estimated to be worth around $1tr globally, but was not encouraged under Mubarak’s regime. This was widely expected to change after his overthrow. Mumtaz el-Saeed, the Egyptian finance minister, told Bloomberg in January: “we are studying issuing sukuk”.

What are the advantages of issuing Sukuk over conventional debt? This is from a beyondbrics article in January:

First, there’s a scarcity of shariah-compliant debt in the region [the Middle East an Asia]. That creates demand and makes it easier to get deals done at a time when many investors are in risk-off mode.

Second, selling sukuk is a way of targeting specific markets: with ample liquidity in the Middle East and Asia, why not sell Islamic debt to those markets – the biggest Islamic debt markets in the world – rather than risking a conventional sale aimed at the US and Europe?

However, as usual, it really all comes down to pricing. At the moment, Islamic bonds from the Gulf are trading at a 50 basis point discount to conventional bonds, according to HSBC/Nasdaq Dubai indices. And if it’s cheaper, the question is why you wouldn’t, not why you would.

That’s especially true when you consider the success of a bond sale in Saudi Arabia in January, the Kingdom’s first sovereign-guaranteed sukuk issuance. It was sold at a profit rate of 2.5 per cent and was 3.5 times oversubscribed – leading one analyst to forecast at least five big new Islamic bond issuances in the country this year.

Related reading:
Saudi sukuk success boosts bond hopes, FT
IMF deal critical for Egypt, say economists, FT
Sukuk’s risk-off bonanza, beyondbrics