Despite a successful economic reform programme implemented in 2016, Egypt continues to grapple with a fiscal deficit. In FY 2019/20 Egypt recorded a deficit of LE462.8bn ($29.4bn), the highest since the start of the 2016 reform initiatives. While this figure contracted to LE432.1bn ($27.5bn) in FY 2020/21, it is forecast to expand to LE475.5bn ($30.2bn) in FY 2021/22, according to a December 20201 report from the Ministry of Finance (MoF). While the deficit has widened, as a proportion of GDP it has been on a downward trend, from 12.5% of GDP in FY 2015/16 to 6.3% of GDP in FY 2020/21. However, it was expected to tick back upwards to 6.9% by the end of FY 2021/22.
The government has turned to several sources of financing to help bridge the gap, including Treasury bills (T-bill) sales. As of October 2021 the government debt held in T-bills totalled LE1.7trn ($108bn). Short-term T-bills have proven to be popular options for foreign investors, as the stability of the currency and high yields made Egypt competitive among its emerging market peers. However, Egypt is one of the countries most vulnerable to interest rate hikes in the US throughout 2022, which could make advanced economies more attractive than high-yielding but high-risk Egyptian T-bills and bonds. Highlighting this vulnerability, foreigners accounted for 22.6% of T-bill issuances in the first half of 2021. As of late September 2021 foreign investors held an all-time high of LE378.2bn ($24bn) in T-bills with maturities of one year or below, according to the most recent figures from the Central Bank of Egypt.
Loans from international organisations have also helped bridge financing needs. In May 2020 the IMF granted Egypt a $2.8bn package to help the country meet its balance of payments needs under the Rapid Financing Instrument programme to support the country’s macroeconomic stability and alleviate some of its most pressing financial obligations. More recently, in October 2021 the World Bank approved a $360m Development Policy Financial loan to support the implementation of the National Structural Reform Programme. It will also be used to help Egypt address some of its long-term structural issues, including macro-fiscal sustainability, debt transparency and management, and the promotion of a green economic recovery.
Another major source of government funding are sovereign bond issuances. In May 2020 the country raised $5bn in its largest issuance to date. The round was over four times oversubscribed and attracted investors from around the world. In addition to covering funding needs for FY 2020/21, it was used to help mitigate the economic effects of the Covid-19 pandemic. The following February, Egypt sold $3.68bn in dollar-denominated eurobonds. Funding from the round, which was also four times oversubscribed, was earmarked to help cover the budget deficit for FY 2020/21. It featured three tranches, including 40-year bonds. Another sovereign bond issuance in September 2021 raised $3bn in six-, 12- and 30-year tranches valued at $1.1bn, $1.1bn and $750m, respectively.
Building off of strong investor interest in the country’s sovereign bonds, Egypt became the first country in MENA to issue a green bond, listed on the London Stock Exchange, in September 2020. Five times oversubscribed, the $750m investment vehicle was sold as five-year bonds with a yield of 5.25%. Proceeds from the bond will be used to finance green projects, including those in renewable energy, clean transportation, sustainable water, wastewater management, and pollution control and prevention.
In addition to green bonds, the government is looking to enter the Islamic financing space. In August 2021 a bill approving the issuance of sukuk (Islamic bonds) was signed into law. The legislation set a term limit of 30 years for all sovereign sukuk offerings and established the Sovereign Sukuk Company in order to manage sales. The government aims to begin issuing sukuk in FY 2022/23, which is expected be valued at around $2bn.
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