Egypt back to JP Morgan’s Emerging Markets Index

CAIRO - 31 Janaury 2022: Egypt officially returned to the JPMorgan index, Monday, Jan. 31, nearly 10 years after its exit from it in June 2011.

Mohamed Maait, Minister of Finance, said that Egypt is one of two countries in the Middle East and Africa within the J.P. Morgan Emerging Market Bond Index (EMBI).

After 2.5 years of Egypt’s pursuit of rejoining the “JP Morgan” index by fulfilling the bank's requirements; which included extending the life of government debt, adjusting the yield curve, and raising the participation rate of foreign investors in government financial instruments with Increase the size of each version, JPMorgan Chase & Co. announced during October its approval of Egypt's inclusion in its emerging market government bond index as of the end of 2022 with an estimated weight of about 1.85 percent.

JPMorgan confirmed that about 14 categories of government bonds denominated in Egyptian pounds, with a total value of $26 billion, are eligible for the benchmark index, with an average return of 14.9 percent for those bonds with duration between 9 months and two years.

The bank's analysts indicated in April that Egypt's local currency bond market would benefit with returns ranging between $1.4 billion and $2.2 billion if Egyptian bonds joined the index.

The index team at JPMorgan put Egypt on positive monitoring of the index in April, after a steady improvement in liquidity and investor access to local government bond markets.

Minister of Finance Mohamed Maait commented that Egypt's accession to J.P. Morgan government bond index for emerging markets, as of the end of next January, is a new certificate of confidence from foreign investors in the solidity of the Egyptian economy.

Maait indicated that this certificate confirms that 90 percent of the foreign investors who were surveyed supported Egypt's entry into the "J.P Morgan"; to become one of only two countries in the Middle East and Africa in this index.

The minister pointed out that Egypt is expected to access the index with 14 bond issuances with a total value of about $24 billion, with a share of 1.85 percent in the index.

Maait added that Egypt used to be a member in this index, but left it in June 2011 for not meeting the requirements of the I.P Morgan, explaining that about 3 years ago, the Ministry of Finance began seeking to re-join Egypt to the Index by achieving the bank’s requirements, including: extending the life of government debt, adjusting the “yield curve” and raising the proportion of foreign investors’ participation in government financial instruments with an increase in the volume of each issue.

The minister indicated that this step reflects the continuous efforts of the Ministry of Finance to reduce the cost of public debt as part of the package of measures taken by the state for economic reforms, explaining that with Egypt's accession to the "J. P. Morgan,” $1 billion of new additional investments will be pumped into the Egyptian government securities market, including treasury bills and bonds, and then achieve the debt management strategy in reducing the cost.

“Egypt’s inclusion in the JP Morgan’s Emerging Markets Index could help attract more foreign investors and foreign currency inflows. However, the Federal Reserve taper and a global rise in interest rates could trigger another wave of selloffs of Egyptian T-bills by foreign investors and renewed capital outflows,” director of Financial Institutions at Fitch Ratings, Zeinab Abdalla, noted.

Fitch Ratings stated in a report that Egypt's inclusion in the JP Morgan GBI-EM bond index from January 2022 will provide some structural support to non-resident investor demand, as could the settlement of Egyptian bonds by Euroclear Bank, anticipated later in 2022.

Egypt is seeking to include its domestic debt in Euroclear, the largest European clearing house for the settlement of securities transactions

"Egypt is still discussing some technical issues and hopes to join Euroclear in a few months, but not by an earlier target date of November,” Egypt's Finance Minister Mohamed Maait said earlier.

For his part, Deputy Division Chief in the International Monetary Fund (IMF) Fiscal Affairs Department Paulo Medas said that the sovereign sukuk issuance, together with the issuance of green bonds and expected inclusion in the JP Morgan Emerging Market Government Bond Index, should help broaden the investor base, deepen secondary markets, and facilitate more reliance on long-term bond issuance. Meanwhile, improving revenue mobilisation, as the authorities have embarked on, including through strengthening customs and tax-revenue administration, will help create the fiscal space for high-priority spending to support sustainable and inclusive growth while keeping debt on a downward trajectory.

Moreover, Standard & Poor's Global Ratings (S&P) expected that Egypt's accession to the J.P. Morgan government bond index for emerging markets by the end of next January will support pumping new additional investments into the government stock market, according to Deputy Minister of Finance for Financial Policies and Institutional Development Ahmed Kojak.

Kojak added, in a statement, that the agency expected that Egypt’s accession to the index would contribute to achieving one of the Egyptian government’s debt management strategy objectives, which is to reduce the cost of financing, in addition to activating the stock market to increase its levels of liquidity, and enhance the demand for government debt instruments, which would reduce its cost through the decline in the return required by investors.

No’man Khaled, an analyst and assistant manager at Investment Bank Arqaam Capital clarified in a press statement that Egypt's weight in the index is 1.85%, allowing it to enter between $10 billion to $12 billion of foreign investments in debt instruments, as soon as Egypt officially enters the index.

Khaled pointed out that Egypt's entry into the index comes at a difficult time, as it will reduce any pressure on the prices of treasury bills and bonds in the local currency, and there will be much higher liquidity to invest in these bills and bonds with the expansion of the investor base.

He said that the volume of funds investing in the JP Morgan Emerging Market Bond Index amounts to about $800 billion.

Khaled stated that Egypt's entry into the index will increase dollar flows, which is an important result at a time when the world is suffering from crises affecting various countries and their foreign exchange flows.

He said that entering the index provides a large offer on treasury bills and bonds, and therefore in the event of the expected rise in interest rates globally in the coming period, the interest rates on Egyptian debt instruments will at least, if not decrease, stabilize. Thus, there will be no need to raise interest rates in Egypt, which will also reduce the cost of these investments while keeping them.

Khaled added that this provides more comfort to the Central Bank, whether with regard to pressure on exchange rates or interest rates, and with the flows of investments through this index, it is possible to cover any negative part in the banks' net foreign assets, thus securing this aspect and strengthening the Egyptian indicators.

On September 23, Egypt closed the process of offering bonds worth $3 billion in three tranches, and collected $3.75 billion from another issuance in three tranches in February, after issuing green bonds for the first time worth $750 million a year ago. It is the first sale of bonds dedicated to environmentally friendly uses from a Middle Eastern country.

Egypt is preparing to issue the first sovereign sukuk offering during the first half of 2022, with the aim of providing financing for investment projects targeted by the Egyptian government.