Not only stocks but also some bonds have exceptional returns. If they are guaranteed by the IMF and the New BRICS Development Bank, then so much the better.
Some sovereign bonds have returned to the spotlight of international investors. These bonds, in particular, boast a yield of 50%. But is it worth investing now?
After a period of strong political and economic instability, which brought this country to the brink of default, $3 billion of new government bonds could soon hit the market.
Despite a fragile economic picture, with high levels of public debt and a volatile currency, in recent weeks we have seen an improvement in its finances thanks to significant capital inflows and international interventions that have increased the value of bonds issued before 2021.
Let’s talk about Egypt.
Let’s analyze the country’s economic context in detail, trying to understand whether the new bond issues really represent an opportunity for investors.
New Egyptian Bonds
Egypt is planning new bond issuances on international markets, aiming to raise around $3 billion by the end of the fiscal year. These instruments, which could include both Eurobonds and Sukuk (Islamic bonds), represent a crucial source of financing for the country.
External debt issuances serve to secure resources to support the state budget, finance infrastructure projects and address public debt.
In particular, Eurobonds denominated in foreign currency (usually euros or dollars) are instruments to access international capital markets. According to Finance Minister Ahmed Kouchouk, the new issue would allow the expansion of the International Monetary Fund loan granted in 2016, which was tied to radical reforms that included tax increases and subsidy cuts, aimed at attracting investors who fled after the violent popular uprising of 2011.
Sukuk are bond-like instruments that allow Egypt to diversify its sources of financing while respecting the laws of Islamic finance (Sharia), thus attracting a wider audience of investors.
These bonds have returned 50%
Having escaped the risk of default, the Egyptian bond market has seen an exceptional recovery in recent weeks. Only a year and a half ago, Egypt was plunging into a serious financial crisis, averted only thanks to the support of the United Arab Emirates and supranational bodies such as the International Monetary Fund (IMF) and the BRICS New Development Bank, which together injected approximately $55 billion in liquidity, reassuring investors of the country’s ability to honor its debts.
- A striking example of the improving economic environment is given by the bond maturing in 2032 and paying a coupon of 7.625%, whose value went from a price of 58 cents to over 87 cents on the secondary market, with a increase of 50% in less than 12 months.
- Another example is the 2050 long-term bond, with a coupon of 8.875%: the price went from 54 cents to 82 cents in 12 months. To make these bonds even more attractive, there is also the gross effective coupon, which has further increased the yield for investors.
Is it worth investing? Risks and future prospects
Despite the dizzying returns of Egyptian bonds, it is always necessary to consider the intrinsic risks linked to this type of investment. Here is what to keep in mind before investing:
- High public debt: at the end of March 2024, external debt amounted to 161 billion dollars, of which approximately 30 billion is short-term. This level of debt, combined with still low foreign exchange reserves (46.6 billion in August), makes the country vulnerable to any global financial crisis or new internal turbulence.
- Trade deficit: imports consistently exceed exports, contributing to an outflow of foreign currency that could further pressure the exchange rate and economic stability.
- Egyptian currency volatility: after a 38% devaluation at the beginning of the year, the Egyptian pound has stabilized, aligning itself with the black market value. This could favor an inflow of foreign capital, as investors do not expect further significant devaluations in the short term. However, the structural weakness of the currency remains a problem for investors in local currency-denominated bonds.
- Double-digit inflation: despite a slight slowdown in August, with a rate of 26.2%, inflation remains very high in Egypt. A cooling of inflation could create favorable conditions for a possible rate cut, to the benefit of the bond market.
- Rating “non-investment grade”: Egypt’s credit ratings indicate that the bonds issued by the country are high-risk and suitable only for investors with a high tolerance for risk. This means that investors must be fully aware that the price of bonds can be extremely volatile.
With a marginal exposure, Egyptian bonds could represent an interesting component, to diversify the portfolio.
|DISCLAIMER
The information and considerations contained in this article must not be used as the sole or main support on the basis of which to make investment decisions. The reader maintains full freedom in his/her investment choices and full responsibility in making them, since only he/she knows his/her risk appetite and his/her time horizon. The information contained in the article is provided for information purposes only and its disclosure does not constitute and should not be considered an offer or solicitation to the public savings.|
Original article published on Money.it Italy 2024-09-25 12:50:00. Original title: Queste obbligazioni hanno reso il 50%. Conviene investire?
