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Reality Bites
Over the past year, Egypt made headlines as it worked to navigate through a challenging macroeconomic operating environment and high external financing needs. In particular, the recent surge in US Treasury yields gave rise to the harmful narrative that “markets are closed” to countries like Egypt that would need to price new issuance yields in excess of 10%. We think this narrative has been harmful as it incentivizes countries to wait until they are facing significant time pressure. Instead, we believe countries should take a long-term view, recognizing that yields move around, and begin to formulate financing plans that acknowledge the reality of current market pricing.
We recently travelled to Egypt to meet with officials and gain first-hand exposure to the country’s thinking and approach to its situation. While Egypt’s efforts thus far have been met with mixed reactions, we think the country’s recent external debt issuance deserves positive recognition. Notably, the new issuance was in the form of a 3-year, USD-denominated sukuk instrument, which is a bond structured in such a way that financial institutions with shariah-compliant (in accordance with principles of Islamic law) mandates can invest. It priced at a yield of 11% and was met with strong demand.
While Egypt cannot control US Treasury yields, it can exercise control over its credit spreads through better policy packages. Importantly, the country recently recommitted to an IMF program with an ambitious set of targets, including allowing the exchange rate to adjust as one component of reducing high external financing needs. In our assessment, the most important elements of the program center on improvements to the business climate. In particular, we think efforts to reduce the footprint of the government and military in the corporate sector should increase the fairness of competition for private sector participants.
We recognize that a lot has been promised as part of the agreement with the IMF and that quick and decisive progress will be the key to its success. These types of reforms will go the furthest toward improving Egypt’s potential growth, increasing its attractiveness for foreign investment, enhancing export capability and boosting its credit metrics. Improving fundamentals, as well as lowering one’s credit spread, is the best way to ensure better market pricing in the future.
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