Central bank leverages Red Sea land to issue sukuk, ease debt burden

Egypt’s Finance Ministry said Tuesday that it had successfully issued sovereign sukuk worth LE3 billion, boosting state finances while “reducing the cost of debt financing.”

The issuance, as with all sukuk, leverages assets as collateral: part of a financial design to ensure the transaction remains technically compliant with Islamic prohibitions on the collection of interest.

In the case of Tuesday’s offering, that collateral is a plot of land in the Ras Shokeir area on the Red Sea coast, according to Mahmoud Nagla, executive director of Money Markets and Fixed Income at Al-Ahly Financial Investments Management.

The use of collateral also renders the debt instrument more secure than conventional financing instruments, reducing the yields owed by the government, Nagla explained. He said, “sukuk provide investors with an additional guarantee — the underlying asset — which enhances their appeal. This also explains why it is important for the government, which thus secured returns at a lower yield than in conventional offerings.”

The sukuk were issued with a three-year maturity, providing return payments twice a year and a yield of 21.56 percent, according to the Central Bank of Egypt. This yield is lower than that of recent issuances of conventional government debt instruments.

If the government were to default on the yield payments, it would not surrender the land, but would instead be responsible for repaying the investor itself.

“The public treasury is the guarantor,” an official at the Planning Ministry told Mada Masr previously. “The investor doesn’t need the asset itself, but instead relies on the state’s ability to pay.”

The latest issuance, announced Monday, marked the first local sovereign sukuk denominated in Egyptian pounds, and the fourth since the government began issuing sovereign sukuk in 2023.

The central bank said it accepted ten offers out of a total of 63 submitted.

The policy direction also aims to broaden the investor base and diversify financing sources, the ministry said in its Tuesday statement. International sukuk instruments mainly target Gulf-based investors, while Tuesday’s locally denominated issuance saw domestic subscribers including Faisal Islamic Bank, Abu Dhabi Islamic Bank, Al Baraka Bank, Kuwait Finance House and other non-Islamic financing institutions and banks.

Egypt’s debt burden

The government has embarked on a strategy to diversify its financing sources, a direction it doubled down on after it lost over US$20 billion in 2022, as investors in short-term sovereign debt pulled out of Egypt’s market in the wake of Russia’s invasion of Ukraine.

It has also sought to lengthen repayment terms within efforts to reduce the debt burden over recent years.

Debt repayments and interest currently account for over half of the annual budgetary allocations.

The government has undertaken a raft of debt management measures to diversify its portfolio, including government debt swaps and the issuance of sukuk and other forms of debt, such as green bonds.

In June, President Abdel Fattah al-Sisi issued a decree allocating a plot of state-owned land — more than 174 million square meters in Ras Shokeir — to the Finance Ministry, a preface to its incorporation into the debt instrument portfolio.