Market Welcomes Egypt’s Entry into Global Sukuk Market with Maiden US$1.5bn Issuance in February 2023 with Robust Optimism Tempered with Subdued Caution

After almost three years of deliberations, the Egyptian Government finally went to the international market in February 2023 successfully closing its maiden US dollar Sukuk issuance – a US$1.5 billion Reg S Rule 144A Sukuk Ijarah offering with a 3-year tenor maturing in February 2026.

“Our success in offering the first issuance of sovereign Sukuk in the history of Egypt,” explained Egyptian Finance Minister Mohamed Maait, “comes in light of turbulent global economic and political conditions, and the high cost of financing as a result of a sharp inflationary wave, in a way that sends a strong message of confidence from global financial markets, investors in the Egyptian economy and its future, and its ability to deal flexibly with internal and external challenges.”

Whether it is the euphoria and novelty of the debut Sukuk issuance by one of the major economies in the MENAT region, despite the current difficult national and global economic conditions, investors from some 250 account holders from the GCC, Europe, Asia, UK, Offshore US accounts, indeed expressed a robust interest in subscribing to the trust certificates. The transaction was over-subscribed four times with the orderbook reaching US$6.1 billion, encouragingly with the participation by asset managers, pension funds, insurance funds, investment firms, and banks.

The issuance is a landmark development in that it is the last of the major OIC economies, Egypt, that joins the growing number of sovereigns in issuing Sukuk as an alternative public debt raising instrument, which also includes non-traditional issuers such as the UK, South Africa, Hong Kong, Luxembourg and Singapore. For Cairo it is a new journey also to diversify its sources of funding and in attracting a new investor base especially from a hitherto untapped market segment looking for quality Islamic debt instruments.

That the Sukuk was issued by The Egyptian Financial Company for Sovereign Settlement (Taskeek), an Egyptian joint stock company wholly owned by the Ministry of Finance and incorporated in the Arab Republic of Egypt, under its US$5 billion Trust Certificate Issuance Programme registered on the London Stock Exchange (LSE) on 14 February 2023, may be significant. The Programme was arranged by Citigroup, Abu Dhabi Islamic Bank, Crédit Agricole, Emirates NBD, First Abu Dhabi Bank and HSBC.

According to The Public Debt Management Unit at the Ministry of Finance, the plan is to issue a number of further Sukuk tranches over the next three years to cover the remaining US$3.5 billion under the Programme, and if needed to extend the size of the Programme in the future.

Egyptian sovereign issuances like its conventional bond offerings will always be subject to the risks associated with the stewardship of the Egyptian economy, especially in controlling inflation and rising food and energy prices, interest rates and unemployment, and political governance risks.

For Egypt to become a major and sustainable Sukuk issuer it has more than four decades of catching up to do. The irony is that the Islamic finance and capital market in many respects was pioneered by Egyptian economists, scholars and Sharia’a experts – a feat achieved in the GCC states, Malaysia, Europe and Turkey, rather than in their home country.

Egypt also has to commit itself in promoting Islamic finance and capital market through the requisite policies, enabling legislation, regulatory and other frameworks, and market education especially in the banking, financial and business sectors. This will require greater opening up of the economy including through privatisation, a process which appears to be on the cards.

The reality is that the wheels of policy and legislative decision-making can turn at a very slow place in an eco-system that has traditionally been regarded by both local and foreign financial institutions as over-bureaucratic, albeit that this mindset is starting to change for the better.

In the case of Sukuk, for instance, the Egyptian Parliament and the Senate approved a new Sovereign Sukuk Law in May 2021. However, the country’s debt management institutional structure took some time to accommodate this new fund-raising instrument and asset class. The law was passed after approval by the Sharia’a Council of Al-Azhar University, the Financial Regulatory Authority (FRA), and other regulatory entities.

After a market and ministerial consultation, the Egyptian Cabinet in April 2022 further approved the executive regulations of the Sovereign Sukuk Law No. 138 of 2021. The issuance of the maiden sovereign Sukuk only materialised on 23 February 2023. Mohamed Hegazy, Head of the Public Debt Management Unit at the Ministry of Finance, at the closing of the Sukuk offering, stressed that one of the most important provisions of the law and its executive regulations is that the assets are privately owned by the state. The proceeds of the issuance will be used finance investment and development projects included in the economic plan of Egypt’s general budget.

The Egyptian Ministry of Finance had mandated Abu Dhabi Islamic Bank, Citigroup, Credit Agricole, Emirates NBD Capital, First Abu Dhabi Bank and HSBC in early February, to act as joint lead managers and bookrunners for its debut sovereign Sukuk issuance and to arrange a series of calls and meetings with investors in the GCC, UK, Europe, Asia and Offshore US Accounts.

The transaction was successfully priced on 23 February 2023, albeit its tenor is unusually short at 3 years for a sovereign issuance in the international market, which does not do much towards building an eventual Sukuk yield curve. According to Emirates NBD, “the three-year US dollar denominated Sukuk carries a 10.875% profit rate. The strong demand from regional Sharia’a-compliant investor base, with 59% allocation to MENA, as well as significant appetite from global emerging market investors led to a 62.5 basis points (bps) compression from the initial 11.625% target to the final reoffer yield of 11%.”

The US$1.5 billion Sukuk, says Ahmed Al Qassim, Group Head of Wholesale Banking, Emirates NBD, uses a unique structure relying on a purchase of usufruct of real estate assets by the Egyptian Financial Company for Sovereign Taskeek and leased back to the MoF. “We are delighted to have been the lead arranger for Egypt’s inaugural sovereign Sukuk and to support the funding needs of Egypt by facilitating access to new pools of Islamic liquidity. The well-received Sukuk represents the third financing transaction we have conducted for the Government of Egypt.”

In July 2020, Emirates NBD was the lead arranger on a successfully priced US$2 billion global syndicated facility through the MoF. The transaction was a debut syndicated bank financing for the MoF and incorporated the first widely syndicated dual Murabaha structure in the region.

The Egyptian government, according to S&P Global Ratings, will ultimately use the proceeds of the Sukuk to finance its investment and development spending. Under the master purchase agreement, The Egyptian Financial Company for Sovereign Taskeek will buy a 50-year right of usufruct to a portfolio of lease assets. These assets will be subsequently rented to the MOF against the payment of rental fees.

“We understand that the amount of these rental fees will be calibrated to match the amount payable as periodic distributions to Sukuk holders. The MOF’s obligations under the lease agreements are unconditional and will rank equally with the sovereign’s unsecured, unsubordinated, and external debt,” said S&P Global Ratings in its rating rationale for the Programme and Sukuk certificates, assigned a ‘B’ foreign currency, long- and short-term ratings.

The Sukuk certificates have been admitted for listing and trading on the Main Board of the London Stock Exchange.

It would be interesting to see how the market impact of this debut Sukuk plays out for the development of the Islamic finance industry in Egypt over the next few years. In a recent interview, Dr Hala Helmy El Said, the Minister of Planning and National Economy, put the business case for a greater role for Islamic finance in the Egyptian economy.

“Islamic finance has great potential in supporting developing countries’ efforts to finance the UN’s SDG agenda. The SDGs require unprecedented mobilization of funds to support their implementation. Islamic finance offers an effective non-traditional means of financing for sustainable development activities and projects in developing countries.

“Islamic financing focuses on the real economy, which comes very much in line with the National Structural Reform Program that the Government of Egypt launched in 2021, which focuses on tackling the root causes of imbalances in the real sector, through the creation of decent jobs, diversifying and develop production patterns, improving the business climate, localizing manufacturing, and enhance the competitiveness of Egypt’s exports. “

Many countries, she maintained, have started to reap the benefits offered by Islamic financing options which lowers their debt to equity ratios for capital intensive projects. Over the next few years, Islamic finance will be considered as one of the primary financing strategies, especially for Egypt. 

To deliver the SDGs, the UN estimates that between US$5 to US$7 trillion per annum needs to be mobilised by 2030. Developing countries face an annual funding gap of US$2.5 trillion to achieve the SDGs. Low-income countries will require the largest increases in public expenditure relative to GDP to fill this gap.

To increase the share of resources available for development purposes and to ensure that these resources reach those most in need, observed Dr El Said, Islamic finance provides a novel option.

“Islamic finance is increasingly adopting sustainability criteria, so it is well positioned to maximise social impact and address the SDGs. It provides an emerging opportunity that could be harnessed by investors and development partners, such as multilateral development organisations,” she added.

Egypt is seeking to diversify its sources of funding; by introducing innovative financing tools, in order to mitigate the SDG financing gap, such as issuing green bonds, Sukuk and climate/SDG debt swaps, co-financing, blended finance, and results-based financing. Egypt is also prioritizing advancing public-private partnerships mainly through the Sovereign Wealth Fund of Egypt. 

One area of opportunity is the issuance of Green Sukuk. Egypt pioneered the first sovereign green bond in the Middle East and North Africa – worth US$750 million – tapping investors interested in financial and environmental returns. Its first impact report shows 46% of proceeds earmarked for clean transport (the Cairo monorail), and 54% for sustainable water supplies and wastewater management.

Egyptian Finance Minister Dr Mohamed Maait at the Annual Meetings of the IsDB Group in Sharm El Sheikh last year, urged the IsDB and Member States to further enhance skills and processes for actualizing Green Sukuk due to the additional framework and reporting requirements by issuers to cater to the demands of investors. This, he added, will help to reap the benefits of diversifying sources of funding as well as attracting new investors including those who focus on Environment, Social and Governance (ESG) and Socially Responsible Investments (SRI) linked instruments.

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