Egypt’s net international reserves are nearing the $30 billion mark, thanks to the completion of its dollar-denominated Eurobond issue of $4 billion.
Until the end of December, the reserves stood at around $24 billion, and the revenue from the new Eurobonds was scheduled to be deposited by 31 January or 1 February. This would take the reserves up to around $30 billion, a figure never seen in the past six years.
The Eurobond issue is one of the steps planned by the government to cover its financing shortfall, with Egypt having a financing gap of over $35 billion until the 2018-19 fiscal year, according to the International Monetary Fund (IMF).
Egypt’s agreement with the IMF for a $12 billion Extended Funding Facility loan is part of the efforts to cover the financing gap, alongside other multilateral and bilateral funding and borrowing from international markets.
Minister of Finance Amr Al-Garhi said the bond issue covered the financing gap for the 2016-17 fiscal year and a large part of the 2017-18 fiscal year. He was speaking at a press conference in Cairo on Sunday to announce the results of the issue.
The roadshow for the issue had originally been planned for late last year, but was postponed until mid-January due to the volatility of global markets following the victory of Republican Party candidate Donald Trump in the US presidential elections.
A Eurobond is an international bond denominated in hard currency outside the borders of the issuing country. It is not necessarily issued in Europe or denominated in euros.
Egypt’s January 2017 Eurobond issue consisted of three tranches, each with a different maturity period: a $1.75 billion five-year note at a yield of 6.125 per cent; a $1 billion 10-year note at 7.5 per cent; and a $1.25 billion 30-year note at 8.5 per cent. The bonds were picked up by investors in the US, Europe, Asia and the Middle East.
Taking such steps would not have been possible without the agreement with the IMF, said Mustafa Al-Assal, chairman of the financial consultancy Bondlink.
There are multiple advantages to the Eurobond issue, according to Sara Saada, chief economist with HC Securities and Investment. These include boosting the country’s reserves, funding the current account deficit and debt repayments, financing part of the budget deficit and regaining access to credit markets.
The issue is also cheaper than domestic borrowing, Al-Garhi said. Yields on Egyptian pound-denominated treasury bills and bonds currently average 18 per cent.
While the dollar revenue from the Eurobond issue will be deposited with the Central Bank of Egypt (CBE), its equivalent in Egyptian pounds will enter government coffers to finance the budget, Ahmed Kouchouk, deputy finance minister for fiscal policies, told the press.
Egypt’s budget deficit came to around 12 per cent of GDP in the 2015-16 fiscal year.
Among the disadvantages of the issue, Saada said, are increases in external debt and debt-service obligations. Egypt’s external debt came to around $60 billion at the end of September 2016, as against $55.8 billion at the end of June.
That figure does not include the first tranche of the IMF loan received in November 2016, or other bilateral and multilateral financing received ahead of the agreement with the IMF.
Recently released IMF documents on its agreement with Egypt show that Egypt’s external debt is expected to reach $66 billion in 2016-17 and continue to rise to reach $102 billion in 2020-21.
Al-Assal acknowledged that Egypt’s foreign debt was increasing, but for the time being there was no other choice, he said. The government needed the money to grow the economy, and until foreign direct investment started flowing borrowing was the only way this could be done.
Borrowing from the Gulf was no longer feasible, and it had often been tied to political conditions in the past, Al-Assal said.
The Gulf economies have been hard hit by plummeting oil prices, prompting them to implement austerity measures. Egypt has received over $25 billion in financial support from the United Arab Emirates, Saudi Arabia and Kuwait since July 2014.
“Those who have invested in Egypt’s debt recognise that the government has a programme in place that the IMF has approved,” Al-Assal said. If Egypt follows through on its reforms, it could borrow more from the international markets, he stressed.
He was confident of Egypt’s ability to repay its dues. “The government would not have ventured into this if it had not been confident of the economy’s ability to generate what is needed to pay back the loans,” he said.
Saada also believes that committing to the reforms that have been announced will put the economy back on the recovery track over the medium term, although in the short term they could result in high inflation, slow growth and a higher budget deficit.
A recent note by Pharos Holding estimates that Egypt’s economic growth rate will decline slightly to 3.8 per cent in the 2016-17 fiscal year, before rebounding to 4.5 per cent and 5.7 per cent in 2017-18 and 2018-19, respectively.
Al-Assal believes that borrowing from the international markets will compel the government to stick to the reforms it has committed itself to. The government was taking the right steps, but there was more work to be done on improving productivity, boosting exports and attracting foreign investment, he said.
The Eurobonds witnessed heavy demand, and they were over three times oversubscribed on issue. This was a vote of confidence in the reforms that had been undertaken, Al-Garhi said, noting that demand for the latest Eurobonds was three times what had been registered for a previous issue in 2015.
Originally the government had planned for a $2.5 billion issue, but after seeing the demand this was increased to $4 billion, the minister said.
Egypt’s Eurobond issue is the largest by an African country in the past five years, Kouchouk told the press conference in Cairo. The government may also issue international bonds in other currencies, including the Japanese yen and the Chinese yuan, Al-Garhi said, though he did not specify the timing.
Banks and investment firms bought 92 per cent of the notes, with the remainder going to hedge and pension funds, Kouchouk said.
According to Al-Assal, this was a good sign as these were “steady, medium and long-term investors, not speculators”. He said the yields on the bonds were in line with Egypt’s credit rating. In November 2016, Standard & Poor’s rated Egypt at B- with a stable outlook.
The yields were also similar to those on bonds issued by comparable economies, such as Ghana, Nigeria and Lebanon, Kouchouk said.
Egypt first entered the international bond markets in 2001 when it issued $1.5 billion on two tranches of bonds, one of which matured in 2006 and the other in 2011.
In 2010, Egypt refinanced its maturing Eurobond issue with another dual tranche for a total of $1.5 billion. Of that, $1 billion matures in 2020, while $500 million matures in 2040.
In 2015, Egypt issued $1.5 billion in 10-year bonds.