A law to regulate the issuance of sukuk is likely to be ready soon
The pieces are falling into place for Egypt’s first Islamic bond sale, as Abdel-Fattah El-Sisi’s government grapples with foreign currency reserves near their lowest in 20 months and debt to overseas oil companies. The Arab nation’s sukuk law is likely to be ready by the start of the new fiscal year in July, according to Finance Minister Hany Kadry Dimian, who told reporters in March the government will sell dollar-denominated Shariah-compliant notes once the rules are in place. Egypt also said in early March it’s preparing to issue its first conventional international bond since 2010.
Dimian’s comments are the strongest signal yet the government of El-Sisi, the former army chief elected in May after the ousting of Islamist President Mohamed Mursi, endorses Islamic finance. Egypt’s currency savings have dwindled by more than half since the 2011 uprising against Hosni Mubarak, leaving the Arab World’s most populous nation largely dependent on handouts from oil-producing Gulf Arab neighbours to keep its economy afloat.
“Given improvements in the economy, they feel there might be appetite for their paper,” says Ahmed Shehada, the head of advisory and institutions in Abu Dhabi at NBAD Securities, the brokerage of the biggest bank in the UAE. “I’m sure they will find enough interest regionally to make it worthwhile.”
Saudi Arabia, the UAE, Kuwait and Oman pledged more than $12 billion at a conference in March to help Egypt’s reconstruction projects, half of them as deposits in the central bank. The $300 billion economy has been growing at near the slowest rate in two decades, according to data compiled by Bloomberg. Egypt’s foreign reserves dropped to $15.5 billion at the end of February, compared to about $33 billion four years earlier.
“The country has stabilised, they want to start implementing the projects, that’s why they’re trying to accelerate the sukuk law,” says Montasser Khelifi, a Dubai-based senior manager at Quantum Investment Bank. “Receiving aid is a good thing, but increasing the self-financing of the country would be a great step for them.”
Egypt had been moving toward a sale of sukuk two years ago under Mursi, whose Muslim Brotherhood administration planned to boost the Shariah-compliant industry with an initial issue of $1 billion of notes. A sukuk law approved by the government in 2013 was never implemented. “Nobody wants to touch it,” Sherif Samy, the chairman of the Egyptian Financial Supervisory Authority, said as recently as August last year.
Egypt has hired banks including Morgan Stanley, BNP Paribas and Natixis for a $1.5 billion non-Shariah compliant bond sale, Dimian said in March. The cash raised will be partly used to pay dues to foreign oil companies, according to Investment Minister Ashraf Salman. The sukuk sale will probably also be used to finance “mega-projects that have been approved by the government during the investment conference” in Sharm El-Sheikh, says Walid Hegazy, secretary general of the Egyptian Islamic Finance Association and managing partner at Hegazy Law & Associates. Egypt signed agreements for a total of $60 billion in investments during the summit, including $18.6 billion worth of engineering, procurement and construction projects.
The pledges come at a critical time for the economy. Signs of recovery in the second half of 2014 have given way to renewed signs of stress from recent data. The Purchasing Managers’ Index, a measure of health for manufacturing, hit a 17-month low in February. HSBC said the data presented a “bleak picture”.
In the run-up to the conference, authorities have taken steps to attract investors, including reducing energy subsidies, lowering income tax and devaluing the pound. The government also set up new mechanisms to resolve commercial disputes, after a series of lawsuits challenging contracts.
Scores of multinational companies sent executives to the conference. Their biggest investment announcements focused on energy and power-generation industries. Siemens signed a deal valued at about 10 billion euros ($10.5 billion) to increase the country’s power capacity by as much as one-third by 2020. Eni, the Italian oil company, signed an initial deal valued at $4 billion with the government to develop Egypt’s oil and gas resources.
The yield on Egypt’s $1 billion of conventional notes due April 2020 dropped 21 basis points this year in mid-March to 4.58 per cent, according to data compiled by Bloomberg. That compares with a 19 basis-point decline in the yield of Middle East bonds on average, according to JPMorgan Chase & Co. indexes. “You want to start building a yield curve that’s independent of the aid and support,” Shehada says. “It’s a step in the right direction.”
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