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Tuesday, 26 February 2013

Egypt: time for a sukuk

Egypt’s continued political turmoil has made its life hard in international debt markets, but its government is hoping to secure new funds by less conventional means through the issue of the country’s first sovereign Islamic bonds.

According to a Bloomberg report, the government plans to raise up to $1bn by June through sukuk sales, with one for domestic investors and one for foreign investors.

“The international market is waiting for Egypt’s sukuk sale,” said Ahmed El-Naggar, adviser to Finance Minister El-Morsi El-Sayyed Hegazi, to Bloomberg. El-Naggar said in an interview with the news agency that the cabinet has finished a draft law to pave the way for the issuance, which would be debated in parliament this week.

Egypt needs funding desperately, with forex reserves at a 15-year low and the pound under pressure, as well uncertainty over a $4.8bn IMF deal. Meanwhile, continued political unrest has prompted multiple rating agency downgrades, most recently by Moody’s, which on February 12 cut Egypt from a B2 to B3 rating, six below investment grade.

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Demand for sukuk, which were first issued by the Malaysian government in 2000, grew strongly in 2012. Data from Dealogic shows total value of new Islamic bond issuance in 2012 to be $44.6bn, up from $33.1bn in 2011. Gulf Co-operation Council issuance accounted for just under half of the total, signifying the strong demand for the security among Egypt’s Arab neighbours.

With demand for sukuk expected to remain strong, they may provide an easier way for Egypt to raise money than western capital markets, Aliasgar Tambawala, an investment manager at Mashreq Capital, explained to beyondbrics.

“There is huge demand in the Middle East for sukuk”, he said. “The issue would likely be well subscribed within the region. The Saudis and Qataris are supporting Egypt already, so the regional demand is likely.”

At current market conditions Tambawala said he expects the Egyptian sukuk to trade with a yield of 6 to 6.5 per cent, but stressed that market conditions between now and the eventual issuance could change significantly.

Tambawala added that he expected the issuance to be primarily dollar denominated given the need to expand foreign exchange reserves. On Monday, the Egyptian government said it hopes to reach reserve levels of $19bn by the end of June, from their reported level as of January of $13.6bn.

He said that any issuance in unlikely prior to the settlement of a deal with the IMF on the stalled $4.8bn loan package. “Until something is sorted out on the IMF loan side, and until there is [political] stability, the likelihood of issuing something before that is low. They can’t pull off a dollar sukuk right away under current conditions, there is too much uncertainty. And for that to go away [Egypt] requires the IMF package.”

Seperately on Monday, the Egyptian government said that negotiations with the IMF would re-open in early March.

(Beyondrics / 26 Feb 2013)

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Kenya Re sets sights on Islamic finance

The Kenya Reinsurance Corporation is planning to venture in sharia-compliant business as it seeks to expand its presence in the growing Islamic finance segment.
The local reinsurer has confirmed that it will start ReTakaful insurance in the country and the areas where it already has a presence in West Africa and the Middle East markets.
“There is a change in the insurance market and we want to take full advantage when it fully blossoms,” said the firm’s managing director, Mr Jadiah Mwarania, during an interview at the head office in Nairobi.
ReTakaful is the alternative form of the conventional reinsurance, which strictly forbids the aspect of brokerage, profiteering, and issues of commission which are against the Islamic faith.
According to Mr Mwarania, the development is part of Kenya Re’s 2013-2017 core strategic areas that touche on market expansion and development of products.
The firm elected a sharia-based supervisory board last year to advise the firm on acceptable aspects of the ReTakaful.
“The intention is to have a department that fully complies with all ReTakaful requirements so that Takaful firms do not shy from giving us business. Now that we are compliant, it will give confidence and inspiration to the Muslim community,” he said.
Members of the board are Abdulkadir Hashim (University of Nairobi lecturer), Mohamed Badamana (chairman, department of animal production, University of Nairobi), Mohamed Ali (Thika Islamic College), and Mwanakombo Noordin, the director of the Moi University Coast campus.
Takaful started in Sudan in 1979 and has experienced sizable growth over the past few years.
The mode of religion insurance is defined into three distinct settings; the Wakalah Model, which is fee-based and where the administrator acts as both an agent and the administrator.
The fee, which is usually a combination of the administration and investment fee, remains fixed annually and all the surpluses belong to the policyholders.
The second model is Mudharabah, which is the pooling of funds for purposes of profit-sharing.
The reinsurer acts as the entrepreneur and participants provide the capital.
Profits and losses are shared between the firm and the participants in a pre-arranged ratio.
Lastly, which Kenya Re has actively taken part, is the ReTakaful hybrid model, which is a combination of the two.
In Kenya, Takaful Africa Insurance Company pioneered the segment, with Gulf and Community banks taking part in penetration of sharia-based products.
First Community Bank has partnered with Cannon Assurance to develop and sell Takaful products in general insurance.
Africa Trade Insurance Agency (ATI) also joined hands with the Islamic Cooperation for the Insurance of Investment and Export Credit last year in March to offer ReTakaful services for imports and exports between Africa and the Middle East.

(Daily Nation / 26 Feb 2013)

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Egypt Seeks Up to $1 Billion From Debut Sukuk

Egypt plans to raise as much as $1 billion by June from the sale of its first Islamic bonds as the government anticipates a return to political stability will soften the blow of five credit rating cuts.
The cabinet has completed a draft law to allow sukuk sales, incorporating revisions by the ruling Freedom and Justice Party and Shariah scholar Hussein Hamed Hassan, said Ahmed El-Naggar, adviser to Finance Minister El-Morsi El-Sayyed Hegazi. Officials have compiled a list of about 25 projects that could be used as assets to back future sales, El-Naggar said in a phone interview on Feb. 21 from Cairo.
“The international market is waiting for Egypt’s sukuk sale,” said El-Naggar, an FJP official who became a ministerial adviser after the ouster of Finance Minister Momtaz El-Saieed in a cabinet reshuffle last month. “I hope to start with two sales, one for domestic investors and one abroad.”
Chaos that accompanied the 2011 uprising that toppled President Hosni Mubarak has shut Egypt out of international debt markets as Standard & Poor’s lowered the country’s credit rating to B-, the same non-investment grade as Greece and Pakistan. The government last sold dollar bonds in 2010, raising $1.5 billion in 10-year and 30-year notes. The yield on the $1 billion debt due April 2020 jumped 102 basis points this year to 7.06 percent as of 3:08 p.m. in Cairo.

Bumpy Transition

Bouts of violence and political unrest that have disrupted Egypt’s transition to democracy have delayed attempts to boost the Shariah-compliant financial industry in the most populous Arab country. The upper house of parliament, which is dominated by the FJP, is expected to debate the draft sukuk law this week, El-Naggar said. President Mohamed Mursi, an Islamist, plans to hold elections for the lower house in April and has ordered the new assembly to convene in July.
Tunisia and Morocco are also seeking to tap Islamic investors after borrowing costs plunged. The average yield on sovereign bonds that comply with the religion’s ban on interest tumbled 126 basis points, or 1.26 percentage points, last year to 2.65 percent, according to the HSBC/NASDAQ Dubai Sovereign US Dollar Sukuk Index. The yield rose 19 basis points this year to 2.84 percent on Feb. 22, the data show.

Soccer Fans

Global sukuk sales are set to surpass last year’s record of $46 billion, led by issuance from the Gulf Cooperation Council, Mohammed Dawood, Dubai-based managing director of debt capital markets at HSBC Holdings Plc, said in an interview in Dubai this month.
Egypt’s borrowing plans come against the backdrop of increasing opposition to Mursi by some ultra-conservative Salafis, political parties calling for a secular state and soccer-fan groups seeking the removal of the public prosecutor in connection to fatal violence in Port Said last year.
The crisis has erased most of the gains in Egyptian bonds since Mursi’s election in June. The premium investors demand to hold Egypt’s dollar-denominated 2020 debt over the benchmark dollar swap rate, or the z-spread, surged 22 basis points last week to 553, according to data compiled by Bloomberg. It was at 562 today, the highest level since June 25, a day after after Mursi was declared winner in the presidential election.

Credit Risk

The cost of insuring Egypt’s dollar-denominated debt for five years soared 176 basis points over the past month to 635, the world’s second-worst performer after Argentina, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
The swaps suggest that “Egypt will have to pay a lot to issue the sukuk,” said Tariq Qaqish, deputy head of asset management at Dubai-based Al Mal Capital PSC. “On a macro level, things are not looking that good. However, this might change if we see political stability which would result in improvement in the economy.”
Egyptian officials held a seven-hour meeting at the Finance Ministry on Feb. 20 to discuss issues including how to secure the best pricing for the first sale, El-Naggar said. The size of the first issuance will be between $500 million to $1 billion, he said.

2013 Growth

The nation’s economic growth slowed in the last quarter of 2012 to 2.2 percent from 2.6 percent in the previous three months and investment declined, according to government data. Expansion may reach 3 percent this year, according to the median estimate of 11 analysts on Bloomberg.
Sovereign dollar sukuk sales in the Arab world are limited to Dubai, Qatar, Bahrain and the emirate of Ras Al-Khaimah, according to data compiled by Bloomberg. The yield on Dubai’s 6.396 percent notes due 2014 is little changed this year at 2.12 percent, the data show. The spread between the bonds and Malaysia’s 3.928 percent sukuk due June 2015 was 73 basis points today, down from 80 at the end of 2012.
The Egyptian government is working to amend the nation’s accounting standards to comply with the Accounting & Auditing Organization, a Bahrain-based body known as AAOIFI, El-Naggar said. The government is also preparing to resume talks with the International Monetary Fund for a $4.8 billion loan to help reduce borrowing costs to finance the biggest budget deficit in the Middle East.
The sukuk sale is going through regardless of IMF talks, El-Naggar said. “We are taking the loan into our consideration but in the end the sukuk issue is separate,” he said.

(Bloomberg / 25 Feb 2013)

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