7 min read 6 Oct 20
Summary: Egypt has just entered the green bond market, pricing a debut $750 million five-year issue.The bonds join a small but growing asset class of emerging market sovereign green bonds. Since Poland issued a green bond in 2016, there’s been growing green emerging sovereign issuance including by Fiji, Nigeria, Indonesia, Hungary and Chile. These have been joined by broader social, sustainable and pandemic bonds, including from Mexico, Ecuador and Guatemala this year.
Egypt’s new issue is the first US dollar sovereign green bond for both Africa and the Middle East, two regions that the country bridges. It counts as Africa’s first: Nigeria’s green bonds were issued in its local currency, and the Seychelles’ $15 million issuance was marketed as a blue bond since it financed projects to protect the archipelago’s oceans. While this is the first US dollar sovereign green bond, there have been numerous Middle East financials issuing in the green space.
Egypt’s green bond is part of the country’s innovative debt management strategy that aims to diversify its investor base, while shifting to longer-term borrowing. The plan is for long-term debt to constitute 52% of its borrowing by mid-2022. The government has regularly issued in USD and EUR, and is working to make its local currency debt more appealing and more easily cleared. It has also signalled its intention to soon add sukuks to its portfolio.
The debut green bond was issued at a yield of 5.25%, close to where a standard Egypt USD with similar duration trades. The order attracted a strong book, prompting the government to increase its offering from $500 million to $750 million. There are still too few other pioneers from which to assess where a green bond should trade relative to a country’s standard debt. Chile, which issued Latin America’s first sovereign green bond in mid-2019, suggests that once issued the green bonds get mixed with other standard bonds and trade similarly. Chile’s green bonds due in 2050 currently have a yield of 2.77%, almost the same as the 2.78% yield on a standard USD eurobond maturing in 2047.
Egypt’s green issuance follows its $5 billion of standard eurobond issuance in May 2020 — the country’s largest multi-tranche deal — that helped Egypt finance its Covid-19 response alongside financing from the IMF and other official lenders, plus the return of foreign appetite for Egyptian pound-denominated Treasury bills and bonds. Egypt’s appeal to investors reflects three factors. First is a good economic policy record and IMF-anchored reforms over the past few years. Second are signs of resilience during this crisis. And third is the government’s clear intention to improve environmental outcomes.
The $750 million raised, plus that from future planned green issuance, will contribute directly to the financing of $1.95 billion of public investment projects tagged as green by the government. These projects are split across six eligible categories, each aligned to one or more of the United Nation’s Sustainable Development Goals (SDG). The net proceeds will enter the general treasury account, so there won’t be a separate account for the funds although they will be tracked internally.
The finance ministry, with support from the World Bank, has developed a framework to label and track what is green financing. What should and what shouldn’t count as green activity can be a contentious topic: I survey the main strengths and weaknesses of the framework below.
This is an excellent first move in expressing Egypt’s sustainable credentials. A lot of hard work has gone into the framework, which with experience can be further improved. The clear environmental objectives will help strengthen Egypt’s ESG credentials. Other frontier sovereigns should look carefully at Egypt’s approach, not only in terms of the green bond and financing framework, but also in how efforts are being made to deepen domestic debt markets to reduce debt risks. Hopefully there is more green issuance to come, but more importantly better environment and health outcomes for Egypt as a result of the investment.
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