Egypt takes bold steps to boost its private sector

Cairo is also weighing the possibility of offering Islamic sovereign bonds denominated in Egyptian pounds in the local market given the availability of liquidity, but it has yet to determine the mechanism and, ergo, the offering value.

As for Eurobonds, says Abu Basha, the government has no plans to offer any in the current fiscal year.

The expert believes that diversifying funding sources not only helps attract additional liquidity to the capital market and expand the currency basket, but also reduces risks relating to public debt and foreign currency by distributing the risk among several currencies.

Surge explanation

He notes that the surge in the yield came as a result of the jump in US interest rates and the Russian-Ukrainian war, which is now in its second year. These challenges, says the economist, take a toll on emerging countries.

In Egypt, these challenges were compounded by Moody's downgrading of the country's sovereign rating from B2 to B3, in a painful blow to Egypt's finances. Today, the country's officials are on the prowl for more funding and more investments from the countries of the Gulf Cooperation Council (GCC).

Read more: Egypt's deal with the IMF comes with dramatic consequences for the economy

Abu Basha adds that the sukuk market has not been very enticing lately for GCC countries, which have large surpluses. Along with Turkey and Malaysia, the GCC is where the biggest issuances in sukuk markets take place. For instance, Dubai paid off two sukuks before their maturity date, he said.

Abu Basha says that better economic conditions can be expected in the second half of the year in light of certain domestic and global factors, but they still are contingent upon the US Federal Reserve Board's decisions on interest rates.

As for Egypt, the expert believes the country must wait for positive developments regarding the state's plans for listing its companies, as well as economic reforms, transparency, and currency stability to attract investments.

Listing of state-owned enterprises

The government intends to sell shares in 32 state-owned companies starting Q1 of this year and until the end of Q1 of 2024, in a bid to raise 6 billion pounds (about $195 million) by the end of 2023. Among the enterprises to be listed are Banque du Caire, Misr Life Insurance, and others working in the electricity, energy, oil, transport, and shipping sectors, according to Hala Elsaid, Minister of Planning and Economic Development.

On his part, Egyptian Prime Minister Mostafa Madbouly said the step reflects the state's serious commitment to its State Ownership Policy Document promises.

Abu Basha says that all eyes are now on how the government intends to partner with the private sector and sell some of its assets to bolster the state's ability to reinforce currency reserves. He adds that there is ground for attracting investments in addition to the GCC support, but it all depends on what the government decides to do.

Some GCC states are seeking to acquire stakes in successful Egyptian companies as the country is currently experiencing a currency crisis.

As the $400 billion Egyptian economy faces piling pressure, securing funding from the GCC is "vital" for Egypt to bridge its $17 billion funding gap in the few coming years, according to the International Monetary Fund.

Several GCC countries, including Qatar, had pledged to inject over $10 billion in Egypt's economy, which is in dire need for foreign currency. Yet, Bloomberg's Asharq Business says Egypt has as of yet only received a sliver of the amount. Turkish companies have also promised new investments at a total value of $500 million in Egypt as the country scrambles for liquidity.

Sukuk market

GCC countries are some of the world's largest issuance bases for sukuk, with Saudi Arabia and Kuwait ranking among the top five issuers.

In parallel with the escalating reliance on sukuk to fund national projects in the case of states and investments in the case of companies, Islamic finance, in general, is gaining global traction as an alternative to capitalism.

A report issued by Refinitiv on the sukuk market in 2022 valued existing issuances as of 30 June 2022 at nearly $726 billion, with 87% of the amount coming from four countries: Malaysia, Saudi Arabia, Indonesia, and the United Arab Emirates. The report estimated the cumulative value of sukuksissued in the past 6 years (2017-2022) at $890 billion.

Refinitiv noted slower sukuk issuance in 2022, with a year-on-year slump of 5.9% to $185 billion. The report attributed the drop to the rise of interest rates following decisions of the Fed and central banks across the world as well as the surge in oil prices, which lessened Saudi Arabia's need to issue sukuk.

On the other hand, mounting pressure on the budgets of emerging economies like Malaysia, Indonesia, and Pakistan was the main driver for sukuk issuance in 2022, which helped maintain the momentum for strong demand.

Refinitiv predicts increased sukuk issuance in the five coming years at a growth rate of 6.8% to reach $257 billion by 2027 as well as a return to pre-2022 levels of issuance in 2024.

Issuance proceeds to fund investment

Finance professor and economist, Dr. Medhat Nafie, tells Al Majalla that "Islamic sovereign sukuk are an important and expanding financial instrument, but it is still far from comparison to conventional bonds. Still, it represents an increasing percentage in Islamic countries and a destination for oil surpluses, for instance. Many of these surpluses can go to projects financed by these sukuk."

Nafie adds: "Several factors contributed to the success of the latest issuance, but it is vital to lower the interest rate since it was relatively high in the last offering."

He says that sukuk are "a great tool to fund projects, as they combine the qualities of bonds and stocks, and there are no doubts regarding debts or loans, which some refuse to deal with."

Investors prefer sukuk, in his opinion, as a high liquidity tool with good rating, and whose proceeds are employed for good projects. This also explains the growing appetite for sukuk and why credit rating agencies grant them a good rating, which he says is "crucial."

As for the state's announcement of its plan to list 32 state-owned enterprises, Nafie believes this to be a "good step" that reflects the state's awareness of the importance of the private sector. It also helps the state reclaim its vital role as a regulator of the markets and an arbitrator rather than a competitor in profitable activities.

This plan will also allow the state to cement its role as a key player in the infrastructure area.

All these factors will help the Egyptian state make gains from the sale of its companies' stocks — whether in the stock market or to strategic investors — and inject the proceeds into vital sectors that the private sector is looking to invest in.

Nafie concluded: "Investor circles are currently brimming with discussions about the actual timeline of the plan, the type of offering for each company (public, stock exchange, private, or strategic investor), and the yield of each offering, to help investors make the right choice."