The global economic turmoil has cast a shadow on the world’s entire financial and monetary aspects, especially across emerging markets. Despite positive economic growth rates over the past two years, a number of key factors have impacted Egypt’s financing instruments to close the country’s funding gap.
In June, Finance Minister Mohamed Maeet said the issuance of sukuk (sharia-compliant bonds) might be postponed to the next fiscal year 2022/23, citing global uncertainty. The minister has said the present economic conditions are not appropriate.
Prior to the Russia-Ukraine war, which broke out in February, the government unveiled plans to issue sukuk worth up to $2 billion in the fiscal year 2021/22, which ended on June 30.
Expensive debt instruments
With a global interest rate race, conventional sovereign debt instruments (government bonds and treasury bills) have become more expensive worldwide. A higher Fed rate has strengthened the greenback globally, negatively affecting the appetite of foreign investors for debt instruments in general.
That’s why sukuk may serve as a better funding instrument at times of high interest rates. However, global sukuk issuance fell to $74.5 billion in the first half (H1) of 2022, against $93.3 billion during the same period in 2021, according to S&P Global Ratings.
“We believe shrinking global liquidity, increasing complexity related to regulatory standards, and lower financing needs in some core Islamic finance markets will hold back issuance for the remainder of the year. Consequently, and even though we expect governments’ local currency issuances will continue to support the development of domestic capital markets, we now forecast total issuance of about $130 billion in 2022 versus $147.4 billion in 2021,” S&P Global Ratings said in a report.
S&P Global Ratings believes that sukuk issuance volumes will decline in 2022 as lower, more expensive global and regional liquidity, increased complexity, and reduced financing needs for issuers in some core Islamic finance countries, thanks to higher oil prices, deter the market.
“The scars of the pandemic and uncertainty related to the financing environment have led many to rein in growth investments, turn to banks for funding, or start deleveraging,” the report said.
Legislative framework
The Egyptian lawmakers passed a sukuk law in 2021 to enable the state to tap one of the world’s key financing instruments.
The law is designed to allow individuals and non-bank financing institutions to invest in these sharia-compliant instruments. It will also attract a fresh category of Egyptian and foreign investors, who do not invest in government bonds and treasury bills.
The law is aimed at opening the door for individuals and corporates that deem interest as haram (unlawful) as ruled in Islam. The majority of Muslim scholars ban interest, which is considered to be riba (usury).
Why sukuk?
By definition, sukuk are more like conventional bonds. Sukuk have a maturity date and their holders receive a regular stream of income (fixed or variable) over the life of the certificate along with a balloon payment at maturity.
From an economic perspective, the sharia-compliant instrument provides a diversified package of interest-free funding solutions whether for the state or the corporate investors. Sukuk can fund the state budget deficit, infrastructure
projects, corporate finances and socioeconomic development.
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