Egypt ventures into Islamic markets

28 February 2013

Doubts raised whether Islamic bonds can plug deficit

Egypt is taking its first steps into the Islamic finance markets after the government approved a draft law allowing the issuance of sukuk (Islamic bonds).

Following cabinet approval of the draft law, it will now be referred to the Shura Council, the upper house of the Egyptian parliament, for review.

The government is planning to issue its own $1bn sovereign sukuk in the coming months.

Cairo is hoping that the introduction of Islamic bonds could boost the country’s very low foreign currency reserves and help narrow the country’s budget deficit.

Under a newly released economic plan, Cairo is planning to narrow the budget deficit to approximately 10 per cent of GDP by the end of the fiscal year to June. The new strategy is part of a government bid to resume talks with the IMF and secure a $4.8bn loan.

However, some market commentators are sceptical about how significant the introduction of sukuk will be in the efforts to reduce the deficit.

“It is published in the local press in Egypt as if it is the solution to the underlying problems in Egypt, but it is just another tool. It will probably tap some previously untapped funds, but that is it,” Ahmed Gad, director, equity research at Egypt’s investment bank EFG Hermes.

He adds that essentially the sukuk is a form of fixed income product and Egypt has not previously had a liquid fixed income market for corporate issues.

Previously in Egypt, foreign fixed income investments were confined to sovereign bonds, either in eurobonds or local-currency treasury bills, but sukuk aims to bring more foreign investments in corporate issues as well as sovereign issues.

The Egyptian government has already drawn up a list of potential new infrastructure projects any potential sukuk will finance.

Under the terms of the draft law, sukuks should only be used to finance new projects rather than existing assets.

This requirement was included due to concerns that the use of a sukuk could be a way of indirectly privatising government assets. In the case of default, existing assets would end up being acquired by private lenders.

Since the revolution in 2011, Egypt saw its credit rating downgraded to B- by ratings agency Standard & Poor’s, which effectively closed the country to the international debt markets.  

The Muslim Brotherhood-dominated government has been a major proponent of Islamic finance, seeing sukuks as a way of attracting Arab investors into the country.

Yet analysts say that due to Egypt’s ongoing political instability and struggling economy, Egypt will have to pay high prices for any sukuk issuance.

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.