Egypt is in dire need of financing. Facing high interest rates from western lenders and a standoff with the International Monetary Fund over conditions imposed on a $3 billion bailout, Cairo is opting to diversify its lending sources.
Last month, Egypt issued a $478.7 million Chinese yuan-denominated panda bond, a first for a Middle East or Africa sovereign. The three-year bond comes with an interest rate of 3.5%: under current market conditions, a bargain compared with dollar-denominated bonds, the government says.
While the panda bond deal comes across “more like a power tool than an asset class per say,” Ishac Diwan, research director, Finance for Development at the Paris School of Economics, reckons that for Egypt it is a life saver.
“It is an important innovation which attests to Egyptian creativity and dynamism in trying to deal with the liquidity squeeze affecting the economy,” Diwan says.
In tapping China’s domestic capital market, Egypt is opening the door for other African nations that might want to end outright borrowing from China and its state-controlled financial institutions. Panda bonds are gaining traction with borrowers seeking to walk away from dollar-denominated bonds and lured by low interest rates in China. They also play a role in the push to de-dollarize global financial systems. In the first half of this year, issuance reached a record high of ¥72 billion, more than a 33% jump over the same period last year, according to Deutsche Bank.
Last month’s deal was not the first time Egypt has taken an innovative approach on the fiscal front. In 2020, it pioneered green bond issuance in the Middle East and North Africa and last year, it became the first African or Middle Eastern country to access the Japanese capital markets, with a $500 million Samurai bond. Egypt intends to ring-fence the proceeds from its panda bond sale, which was guaranteed by two multilateral development banks, to finance sustainable development in areas like transport, energy, water, health, and small and medium-size enterprises. This, it anticipates, will safeguard the funds from being directed to settling massive maturing debts.