CAIRO — Egypt is hoping to appeal to Asian investors by issuing so-called Samurai bonds in Japanese yen and Panda bonds in Chinese yuan.
The Egyptian Ministry of Finance officially announced Feb. 3 that it will launch the bonds in Asian markets in February or March. The ministry has yet to reveal the value of the Egyptian bonds in Asian currencies, the details of the banks that are expected to issue them or even the bonds’ intended interest rates.
They are, however, part of a package of euro- and US dollar-denominated bonds with a total value between $3 billion and $7 billion. Egyptian Finance Minister Mohamed Mait announced that package in a Jan. 13 statement.
With the anticipated proceeds, Egypt is looking to bridge the financing gap in its public budget, which is set to be drafted in July. Officials said at the end of December that the state budget deficit was expected to reach 440 billion Egyptian pounds ($25 billion) at the end of the current fiscal year in June 2019.
Egypt also seeks to support the cash reserve, which fell almost $2 billion from November to December 2018, from $44.51 billion to $42.55 billion, after Egypt settled part of its foreign debt, which stood at $92.64 billion for the fiscal year that ended in June 2018. Egypt had borrowed heavily from abroad following the economic reform program it drew up with the International Monetary Fund in 2016.
Although many economists are optimistic about the planned bond issue, some pundits have warned of a potential flop. Many investors are pumping their money into the bonds of other emerging markets such as Turkey and Argentina, given their comparatively high interest rates.
Turkey's key interest rate is 22%, and Argentina's is 60%. Meanwhile, Egyptian bond sales show a rate between 5% and 8%.
It's noteworthy that the Egyptian Ministry of Finance canceled three bond auctions in 2018 after European bankers and investors demanded rates competitive with Turkish and Argentine bonds.
Wael Nahas, a financial adviser to several investment entities in Egypt, told Al-Monitor, “Egypt must stop relying to such an extent on debt instruments, including bonds and treasury bills, to close the funding gap in the state budget.”
He noted that Egypt may have to increase the interest rates it offers. This is especially true since the cash reserve is also declining, which is causing the Egyptian economy to plunge into more debt.
Nahas also said the Egyptian government’s approach of freezing bond yields in the cash reserve will only lead to more debt in coming years, as the cash reserve declines when the country repays the annual debt tranche, and seeks to fill the budget deficit.
“Therefore, it's necessary to take advantage of what Egypt gets from the proceeds of bonds and other debt instruments in major development and investment projects to generate an annual upward income that would help repay debts without the need to borrow again in the following years,” he explained.
Rashad Abdo, head of the Egyptian Forum for Economic and Strategic Studies, told Al-Monitor, “Issuing Egyptian bonds in Asian markets is totally different from [issuing] international bonds in US and European markets, as was the case last year.”
He expects these bonds targeting Asia to be a success since they are directed toward local Asian investors who have capital in their Asian currency and do not seek to convert a big chunk of their funds into euros or dollars to buy Egyptian bonds from European and US markets.
Abdo explained that emerging markets such as Turkey and Argentina did not opt for issuing bonds in Asian currencies in Asian markets, which means less competition for the Egyptian bonds there. He also predicts that others will turn to Asian markets in the coming months after gauging Egypt's success there. “By then, however, Egypt will be leading the Asian bonds,” he said.
Khaled al-Shafei, an Egyptian economist, concurred with Abdo, saying, “The Egyptian Ministry of Finance's step to issue bonds in Asian markets and in the local currencies [there] reflects Egypt’s economic vision.”
He said he expects growing international investment in local currencies "because the US dollar is not likely to remain the most appealing currency in light of [US President] Donald Trump’s policies,” he told Al-Monitor.
“The US dollar lost some of its value because of falling demand, with Trump imposing import restrictions on China, which retaliated in kind,” he added. Shafei said he expects demand for the US dollar to continue its decline if the economic relationship between the United States and the European Union worsens.
Some Asian currencies such as the Japanese yen and the Chinese yuan are likely to see more demand, especially as Japan and China possess large trade markets.
“The success of Egyptian bonds in Asian markets [will depend] on launching a solid road show for Asian investors and major investment funds operating in these countries, including the Gulf investment funds,” said Chahir Zaki, an economics professor at Cairo University.
He added that smart promotion includes highlighting competitive factors in favor of the Egyptian market against other emerging markets. Egypt could be able to repay its debt in a safer manner than some emerging markets such as Turkey, whose debt increased by $500 billion in 2018, or Argentina, which failed to repay its debts more than once in 2014 and 2015.