Despite its need for financing, why did Egypt freeze the offering of the first sovereign sukuk?

Cairo -

The Egyptian government was forced to freeze one of the sources of funding it was counting on to ensure the continuation of foreign investment flows by its decision to postpone the offering of the first Islamic sovereign sukuk before the end of this month in June.

Despite the government's readiness for this step, the current international market conditions are not conducive to implementing the offering as scheduled before the end of the current fiscal year, according to press statements by Egyptian Finance Minister Mohamed Maait.

Egypt was close to offering sovereign Islamic bonds, for the first time, in the middle of this year, as it appointed 6 banks to manage its first issuance of sovereign bonds worth two billion dollars after completing the preparation of a special law for it.

In August 2021, President Abdel Fattah El-Sisi ratified the Sovereign Sukuk Law, which was finally approved by the House of Representatives last June, after a heated session that witnessed widespread controversy over the law between supporters and opponents, but it ended with the approval of the majority.

What is the relationship of the freeze to the possibility of downgrading Egypt's credit rating?

It seems that the decision to freeze the issuance of sukuks was affected by Moody’s’s credit rating of Egypt, changing the future outlook to negative instead of stable, at the end of last month, and its warning that a further decline in foreign reserves with the Central Bank might push it to lower the country’s rating. For the first time since March 2013.

But Moody's expectations regarding the decline in the cash reserve were later achieved, and it fell to 35.5 billion dollars at the end of last May from 37.1 billion dollars last April, a decrease of 4.4%, according to the Central Bank of Egypt.

The agency warns that rising domestic borrowing costs, if sustained, will exacerbate liquidity risks and debt sustainability challenges, both of which are long-term weaknesses in Egypt's credit profile.

Sovereign sukuks are nominal government securities of equal value and negotiable, issued for a specified period, not exceeding 30 years, renewable, and they represent common shares in asset usufruct rights as determined by the prospectus, and they are compatible with Islamic Sharia, but are characterized by a high return, due to the high the extent of the risks involved.

With the increase in external and internal commitments in foreign currencies, Egypt is seeking to diversify sources of financing, between dollar and green bonds, "Eurobonds" and sovereign sukuks, and attract a new segment of investors, in light of the high costs of importing basic commodities such as grain and oil, and the high return on borrowing operations.

Pessimistic scenarios put forward by the writer Imad El-Din Adib about stability in #Egypt in the absence of the flow of dollar support from the Gulf countries pic.twitter.com/KynjYfq7ay

- Al Jazeera Egypt (@AJA_Egypt) June 13, 2022

Why were sovereign sukuk frozen?

Dr. Ahmed Khuzaym, an economist and head of the Development and Value-Added Forum, believes that the Egyptian government’s decision to freeze the process of offering the first sukuk is “an inevitable result of two things: the turmoil of financial markets in the world, and Moody’s changing the outlook for Egypt’s future from stable to negative, which means raising interest rates on borrow.

Khuzaym stressed, in statements to Al Jazeera Net, that the decision is correct and avoids the government getting involved again in bearing high interests, especially since Egypt has exhausted its quota from the International Monetary Fund and obtained double it, considering that it is an indication that the Egyptian negotiator has come a long way from negotiations on a new loan with the Fund. Therefore, Egypt chose to postpone the offering.

The Egyptian government has already entered into difficult negotiations with the International Monetary Fund to obtain a new loan of 3 to 5 billion dollars, in addition to the 20 billion that the country borrowed during the period from 2016 to 2020, through 3 different agreements.

High interest rates, a weak currency, and broader investor warnings from emerging markets suggest that Egypt may pay exorbitant sums to finance an expected $30 billion budget deficit for the fiscal year that begins next July, according to a Reuters report.

In a move that increases the cost of return on borrowing, the US Federal Reserve announced, on Wednesday, the largest increase in interest rates in nearly 30 years, while raising the reference borrowing rate by 75 basis points to reach between 1.5% and 1.75% in order to confront the rise in inflation.

Alternatives to the Egyptian government

Egypt recently signed several huge international agreements worth billions of dollars between loans, grants and aid with many international institutions and banks.

In order to finance the purchase of basic commodities such as wheat, grain and petroleum products, in light of the continuing Russian war on Ukraine.

On June 3, the Egyptian government announced the signing of the amended framework agreement with the International Islamic Trade Finance Corporation on the supply of basic commodities with a credit limit of $6 billion.

Meanwhile, Egypt is preparing to obtain more than $600 million (US$497.5 million from the World Bank, and $107 million from the European Union) to support wheat imports and improve the storage silos system, according to Reuters.

European Commission President Ursula von der Leyen revealed, during her meeting with Sisi in Cairo, on Wednesday, that the European Union provided $100 million to Egypt to confront the price and food crisis.

In addition to the above, the Egyptian government is counting - and the conversation is still with the economist Ahmed Khuzaym - on the sale of state-owned assets to provide tens of billions of dollars over the next few years to mitigate borrowing and interest obligations, which have risen significantly.

The Egyptian government announced in the middle of last month its vision to get out of the economic crisis the country is going through, including making state-owned assets available worth $40 billion to partner with the Egyptian or foreign private sector for a period of 4 years, offering 10 public sector companies on the stock exchange, and merging the largest 7 ports. Egyptian companies under the umbrella of one company, as well as offering percentages of the largest distinctive hotels on the stock exchange.