On Tuesday, Egypt issued its first sustainable international panda bonds worth 3.5 billion Chinese yuan (approximately $500 million) on the Chinese financial market. It is the first country from the Middle East and North Africa to do so.
Panda bonds are yuan-denominated bonds issued in China by foreign entities. They allow foreign borrowers to tap into the Chinese capital market.
Egyptian Finance Minister Mohamed Maait said the bonds carried a low annual interest rate of 3.5 percent over three years. According to Egyptian officials, the rate is lower than the rates of dollar-denominated bonds. The Bank of China, one of the financial advisors for the issuance, said on its website that the guarantee covers both the principal and interest.
"We are working on diversifying our financing sources through different capital markets as well as securing guarantees from several institutions to reduce the cost of the debt during this challenging high interest-rate environment," said Maait last week.
Egypt received backing from international development banks, including the Asian Infrastructure Investment Bank and the African Development Bank, for the panda bonds.
"This first Panda bond issuance by an African sovereign is the perfect example of how African Development Bank Regional Member countries could leverage the Bank's AAA credit rating to penetrate new markets and mobilize sustainable financing at competitive terms from international investors," said Mohamed El Azizi, African Development Bank Director General for North Africa.
Panda bonds also serve as a new gateway for increasing cooperation between Egypt and China. According to data from the Central Bank of Egypt, in the Egyptian fiscal year 2022-2023, China was Egypt's largest import partner, with a 10.1 percent share (roughly $2 billion).
So far, the panda bonds have gained much interest from Chinese investors. As a result, the bonds are oversubscribed. The issuance of these bonds will be a benchmark for future issues in the Chinese markets, said Ahmed Kouchouk, Deputy Minister of Finance for Financial Policies.
The bonds will finance Egypt's inclusive growth and green objectives under the Sovereign Sustainable Financing Framework that aligns with Egypt's National Climate Change Strategy 2050.
This framework targets sustainable development through investments in clean transportation, renewable energy, energy efficiency, sustainable water and wastewater management, financing for micro, small and medium-sized enterprises and essential health services initiatives.
Egypt's debt situation
Egypt's credit rating was downgraded by Moody's to "Caa1" from "B3," pushing it seven levels into junk territory and representing the country's lowest-ever rating. This signifies a "substantial risk" for Egyptian government bonds.
Moody's cited the country's deteriorating debt affordability as the primary reason for its decision. Economists anticipated that this downgrade would create short-term challenges in attracting investment to Egypt.
As a result, Egypt's dollar-denominated international bonds fell to their lowest levels since May on October 8, losing nearly 3 cents.
Earlier this week, Minister Maait reaffirmed Egypt's determination to settle its external debt obligations in the upcoming years. The country plans to use various financial instruments and access different markets for additional funding, including sukuk, green bonds, panda bonds and an Initial Public Offering (IPO).
Egypt's central bank data reveals a total of $11.76 billion in medium- and long-term debt due in the second half of 2023. This total includes a $500 million Eurobond set to mature in November. In addition, there is $14.60 billion due in the first half of 2024.
Egypt's foreign debt has quadrupled over the past eight years, reaching 43 percent of the country's GDP. This surge has prompted investors to withdraw from Egyptian markets, exacerbating the nation's financial challenges.