“These Bonds Yielded 50%: Is It Worth Investing?”

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International Attention on Sovereign Bonds

Recently, several sovereign bonds have piqued the interest of international investors due to their remarkable yield of 50%.
However, the question remains: is it a wise time to invest?

Following a tumultuous period marked by significant political and economic instability, which nearly led this nation to default, the prospect of issuing $3 billion in new government bonds is on the horizon.

Despite a fragile economic landscape characterized by high public debt levels and a volatile currency, recent weeks have seen an improvement in the country’s finances, spurred by crucial capital influxes and international interventions that have bolstered the values of bonds issued prior to 2021.

This country in question is Egypt.
Let’s delve deeper to understand if the upcoming bond issuances truly represent a viable opportunity for investors.

The New Egyptian Bonds

Egypt is set to launch new bond issuances on international markets, aiming to raise around $3 billion by the end of the fiscal year.
These instruments may encompass Eurobonds and Sukuk (Islamic bonds), which are vital sources of financing for the nation.

The proceeds from these foreign debt issuances are intended to support the state budget, fund infrastructure projects, and manage the country’s public debt.

Specifically, Eurobonds, issued in foreign currencies (typically euros or dollars), are a way to access international capital markets.
According to Finance Minister Ahmed Kouchouk, this new bond issue will enable Egypt to extend the IMF loan granted in 2016, which entails radical reforms, including tax increases and subsidy cuts to attract investors who fled following the violent popular uprising in 2011.

Sukuk offers similar characteristics to bonds while allowing Egypt to diversify its financing sources in compliance with Sharia law, thus appealing to a broader range of investors.

Significant Yield Amid Economic Recovery

Having narrowly avoided default, Egypt’s bond market has witnessed remarkable recovery in recent weeks.
Just a year and a half ago, Egypt was on the verge of a dire financial crisis, barely averted through the support of the United Arab Emirates and multilateral organizations like the IMF and the BRICS New Development Bank, which injected approximately $55 billion in liquidity, reassuring investors about the country’s ability to meet its debt obligations.

A prime example of the economic improvement is a bond maturing in 2032 with a coupon rate of 7.625%, whose market value surged from 58 cents to over 87 cents in the secondary market, rising by 50% within less than a year.
Another notable bond is one maturing in 2050 with an 8.875% coupon, whose price jumped from 54 cents to 82 cents in the same period.

Investment Considerations: Risks and Future Prospects

While the staggering yields of Egyptian bonds are attractive, it is crucial to acknowledge the inherent risks associated with such investments.
Here are some key factors to consider before investing:

• High Public Debt: As of March 2024, Egypt’s external debt stood at $161 billion, with around $30 billion maturing in the short term, rendering the nation susceptible to potential global financial crises.
• Trade Deficit: A persistent imbalance with imports exceeding exports can lead to a depletion of foreign currency reserves, further stressing the exchange rate and economic stability.
• Currency Volatility: The recent 38% devaluation of the Egyptian pound has led to stabilization at market levels, attracting foreign investment but still posing a threat due to structural weaknesses.
• High Inflation: While inflation slightly eased to 26.2% in August, it remains high, impacting purchasing power and investor sentiment.
• Non-Investment Grade Rating: Egypt’s credit ratings indicate a high-risk profile, implying that investments should be approached with caution due to potential volatility.

Ultimately, while Egyptian bonds could enhance a diversified portfolio, investors need to weigh the risks involved carefully.

Disclaimer: The information in this article is for informational purposes only and should not be regarded as investment advice.
Readers are encouraged to consider their risk tolerance and investment horizon before making decisions.

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