Opinion: Green Bonds and the Future of Finance in Egypt

by Medhat Nafei

Green transition has become a major concern to many countries. The future of finance will witness a dramatic shift toward more environmentally friendly, socially responsible and governed projects thanks to the Sustainable Development Goals (SDGs) announced through the United Nation’s general assembly meeting in 2015 and widely recognized by many countries since then.

Egypt in turn adopted its 2030 vision, guided by 17 goals and a number of sub-goals. Although the United States’ new administration is starting to show signs of undermining global green finance initiatives and objectives, the mainstream is still supportive of these efforts, which are also governed by international organizations and reputable financial institutions.

Why we need green bonds

Access to finance is a main issue in Egypt due to the huge recovery bill following two people’s revolutions in just a few years. Grand projects that were politically and socially required for such a recovery created real pressure on the public budget deficit. Economic reform must be built upon various alternatives, including non-conventional financial products that provide a broad spectrum of options to finance different project schemes. Infrastructure projects can possibly be financed through public private partnerships (PPPs) so that public investment is not the only gate to provide and enhance public services.

Meanwhile infrastructure projects that are basically required to [alleviate] poverty and provide basic needs are normally financed with fixed-income products. This means that debt is required to finance those projects; not equity as wrongly claimed by non-specialists repeatedly asking the government to raise funds by selling shares of the new projects to the public.

We can then assume that the current Egyptian financial crisis is a function of poor access to finance. Fixed income products are essential for economic reform but having the private sector bear some risks with the government and having the projects guarantee these debts will be more [practical] to decision-makers, especially with the total public debt surpassing the GDP for the first time in decades. It is time to think out of the box, develop financial products that fulfill the government’s plan to establish at least 12 mega projects throughout the country, accomplish sustainable growth and appeal to the international investors’ appetite.

The answer could be green finance at large; the most specific to our urgent goals will be green bonds.

A booming sector

The green bonds market—which has grown at an annual rate of 94% since the European Investment Bank (EIB) issued the first green bond in 2007 (the global bond market currently stands at slightly more than $90 trillion—is a long-term market as 70% of the bonds have tenures of 10 years or more.

China, once considered the most threatening country to the environment and the most reluctant to accept international pressure to switch to a more environment-friendly economy, has recently realized the importance of green bonds. But it was the desire to gain, rather than that to become responsible, that drove China to become a large green bonds issuer. Currently, around 35% of outstanding green bonds are denominated in Chinese RMB, the vast majority of which are onshore bonds representing 87% of emerging markets’ issuances as of last September. Chinese-based issuers also issued approximately $2 billion denominated bonds on offshore exchanges. The majority of issuance is from government entities with over 60% of outstanding bonds issued by local governments, multilateral development banks, agencies or state-owned entities.

The EIB has issued the largest number of green bonds to date—worth over $17 billion. There have been bank issuances in India, Turkey, Columbia and Costa Rica as well as non-bank issuances in Brazil, Mexico and South Africa.

Green bonds are growing exponentially as a means of financing climate-related products with Green Bond Universe reaching $694 billion in 2015. Not all green bonds, however, are labeled, which means most of the issued green bonds are only climate aligned and so not accredited or stamped as “green” from internationally accepted specialized rating agencies. Out of the $694 billion outstanding bonds, only $118 billion are labeled as green bonds. The cost of labeling, however, is not big, so it is preferable to issue labeled green bonds to avoid faking green projects and losing credibility as a result.

A road map to issue green bonds in Egypt

Green bonds need not at first be listed and traded on the Stock Exchange to be issued in Egypt. Over the Counter (OTC) green bonds are most common worldwide, though it is always recommended to get the stock market involved in the process of issuance from day one for many reasons. The stock exchange has accumulated good knowledge about financial products, investor’s appetite toward them and, most importantly, how to pave the way for such products to be widely accepted in the market through awareness and marketing campaigns. A series of workshops that buyers and sellers are invited to attend could be helpful to introduce the concept of green bonds to the Egyptian investor.

Cooperation and partnerships with international financial institutions issuing infrastructure green bonds have always been successful. Public-private partnerships are also encouraged for new issuances and welcomed by the Egyptian government.
Green bonds can be issued for the purpose of refinance which lowers the risk borne normally in green field projects. The presence of the state guarantee will inevitably improve the credit risk of any project, especially the new ones. Diminishing credit risk and higher credit rating will compensate the relatively low yield expected from green bonds; [putting] the environment and society first will always imply extra costs that slash some benefits.

In addition to market awareness and road shows, there are many ways the stock exchange can help promote green bonds in domestic markets, including

Establishing a green stock index: Promote the creation and use of green stock indices that orient the capital market to green industry. It is worth mentioning that the Egyptian Exchange introduced an ESG index (S&P/EGX ESG index) early in 2010 in cooperation with Standard and Poor’s to become the first market in the region and the second worldwide that owns an index whose main screening criteria are based on environment, social responsibility and governance performance of the listed companies.

Developing green bonds: It is recommended that regulatory authorities issue guidelines for green bonds, define and classify green bonds, consider tax exemptions for green bonds interest, support the development of green bonds with modest interest subsidies and credit enhancement policies, and build an environmental performance tracking and evaluation system for green bonds.

Establishing a green channel in the Initial Public Offering (IPO) process: Simplifying the IPO review or filing procedures for companies that meet the definition of green enterprises is also necessary.

Establishing a carbon trading system and promote carbon finance: Creating trading systems can demonstrate how to reduce emissions at lowest costs.

Launching a national green development fund: A national fund could provide a valuable link in the financial system by providing equity that can be leveraged to enable access to other financing channels, such as bank loans, and provide support investments into industry upgrading.

Why would a financial institution issue green bonds in Egypt?
Green bonds enhance franchise value of the firm and the issuers’ credibility in competing for opportunities with a sustainability dimension. That then allows for tapping a wider investor base with increased demand over time that is likely to drive relatively favorable terms and better prices to issuers. It also allows issuers to raise longer-term funding.

But there must be a will for a move to green finance. Only a few months after Egypt raised the issue of green bonds in a global workshop, Morocco developed its four issuances of green. Many obstacles were present then and deprived Egypt from preceding Morocco in its move; most importantly the rigid exchange rate policy before November 2016.