Egypt has signed a new sukuk bill into law, paving the way for an Islamic issue that could go some way towards relieving the country’s spiralling financial condition.
Access to the capital markets is likely to be crucial for the country, which has seen its foreign currency reserves dwindle dramatically since the uprising that ousted Hosni Mubarak in early 2011, although they did increase by $1 billion in April to $14.43 billion following a deposit from Libya.
On Thursday Standard & Poor’s cut Egypt’s credit rating from B- to CCC+, saying: “The downgrade reflects out view that the Egyptian authorities have yet to put forward... a sustainable medium-term strategy to manage the country’s fiscal and external financing needs.”
Egypt is lobbying for a $4.8 billion loan from the IMF, to which a great deal of additional funding is also linked, but has not yet implemented subsidy reform that the IMF has made a condition for the loan.
It is understood that Egypt may seek to issue an international sukuk before the end of June, and since sukuk must be linked to tangible assets, the funding would likely be for infrastructure development.
The bill has had a difficult progression into law following objections from the country’s powerful Al Azhar body of scholars that it was un-Islamic. Only after Al Azhar’s suggestions were incorporated did the bill pass Egypt’s Shura Council last month.
Egypt will have studied the successful debut sukuk issues from other sovereigns in the last year, most obviously Turkey, which raised $1.5 billion in a 5.5-year sukuk issue in 2012 in an issue,which priced 10 basis points cheaper than yields on Turkey's comparable non-Islamic bonds at the time.
Qatar’s ability to raise $4 billion in a single Islamic issue last year will also have stood out, although clearly Egypt’s fundamentals are nothing like Qatar’s and there will still be a considerable job to do in convincing investors that Egypt has passed an inflection point and is worthy of investment.
Sukuk are a centrepiece of bond market reform across North Africa, with Morocco also putting in place legislation to allow for a debut sukuk issue. Earlier this year Morocco’s minister of economy and finance, Nizar Baraka, told Emerging Markets: “There is a lot of demand for Morocco sukuk. We have a very good relationship with the Gulf and Arab countries, and they all ask us when we will do a sukuk.”
Both Morocco and Egypt are likely to start out with international sukuk, but local capital market reform is also understood to be on the agenda with EBRD backing, as is also the case in Tunisia and Jordan.
The EBRD is understood to have been seeking information from ministries, banks and central banks about what is needed, with the intention of improving access to funding, including through private equity.
Egypt and Morocco also have North Africa’s most significant stock markets, and Morocco’s in particular is amid gradual reform.
“On the positive side, Morocco has passed legislation which allows securities lending,” said Walter Siouffi, managing director for Morocco for Citibank Maghreb. “But to foster development of a derivative market, the ability to short sell equities, bonds and T-bills is still lacking.”
New laws have been passed to give automatic offset rights for equity securities lending, he said, but this needed to be extended to cash and bonds to enable more effective trading. “We understand this is under review in the context of developing the capital markets.”
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