Securitization: a solution to the economic crisis in Egypt or a deepening?
The scarcity of the dollar in Egypt still represents the biggest crisis for the economy, which is already suffering from several internal and external crises. The Egyptian government has put forward a number of ideas and solutions that may contribute to confronting the crisis, confronting the brutality of the parallel market, and avoiding the negative effects of the international institutions’ reduction of Egypt’s credit rating.
Securitization was one of those solutions that were recently put forward on the scene with the aim of providing dollar revenues that contribute to reducing the current economic crisis, providing dollars to meet the dollar needs for importing basic goods to the local market, and paying obligations to international debt institutions, which this year alone amount to about 42 billion dollars.
The Egyptian government said that it is considering issuing securitization bonds in exchange for a portion of its future dollar revenues, with the aim of raising about $10.1 billion in several stages during the fiscal year 2024-2025, based on a document issued by the Egyptian Council of Ministers regarding “features of the strategic directions of the Egyptian economy during the period 2024-2030.” ", which proposed the possibility of securitizing about 20% to 25% of Egyptian dollar revenues.
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This comes in light of high rates of inflation amid a significant rise in the prices of basic commodities as a result of the repercussions of the Russian-Ukrainian war, with core inflation reaching 34.2% on an annual basis in December, and this came as a result of a rise in the price of the dollar in the parallel market, which exceeded 60 pounds per dollar. While it is about 31 pounds in banks.
What is securitization?
Securitization is defined as a financial process that aims to obtain a portion of the future profits of public assets such as a company, bank, or public authority, and convert their future profits into immediate liquidity, by issuing bonds with a portion of the future revenues of those assets and securitizing them in return.
According to the International Monetary Fund, the concept of securitization began since the mortgage crisis that began in 2007, which gave a new concept, which is securitization, which lasted for decades. Securitization means the process in which certain types of assets are collected with the aim of offering their returns to buyers of securities.
The process of securitization began in the 1970s, when mortgage loans were pooled by agencies backed by the US government.
Beginning in the 1980s, other income-producing assets began to appear that could be securitized, and in recent years the market has grown significantly. In some markets, such as those for leveraged securities.
Suez Canal
The Suez Canal comes at the top of the Egyptian assets that are expected to be included in the package of assets that will be securitized, as it is the most sustainable and one of the most important sources of dollar income for the Egyptian state, which, according to the head of the Suez Canal Authority, Osama Rabie, reached $9.4 billion in revenues from the Suez Canal during the fiscal year. 2022-2023.
Despite the geopolitical tensions that the Red Sea region is going through, which have negatively affected the Suez Canal, the canal remains the most important waterway for global trade, especially with international movements aimed at maintaining the security of maritime navigation in the Red Sea.
Despite fears of rejection in the Egyptian street, the Egyptian government announced that these proposals will be presented for community dialogue with the aim of reaching a community consensus on the optimal solution for securitizing the dollar revenues of the Egyptian state.
The decline in credit ratings complicates the situation
Egypt's path to the international bond market has become more difficult after international rating institutions downgraded the Egyptian economy, the most recent of which was Moody's credit rating agency changing the outlook for the sovereign rating of Egyptian government debt to negative instead of stable, and the agency kept Egypt's credit rating at caa1, which is what analysts consider The future outlook should change a point before another decline in the credit rating. Moody’s lowered Egypt’s sovereign rating last October from B3 to Caa1 with a stable future outlook, which puts Egypt facing a real crisis in providing dollar liquidity to pay international obligations.
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With the decline in foreign direct investments and the exit of a number of Gulf and foreign companies operating in the Egyptian market during the past period, this has deepened the dollar gap.
Cash box and additional package
Securitization comes as an additional tool with the movements currently underway with the IMF, which had previously approved a financing package worth $3 billion in November 2022, divided into 6 tranches. Egypt currently hopes to increase the financing to about $10 billion and enhance communication between the Fund and the Egyptian government through mutual visits. During the past few period, with the aim of conducting the first and second review.
The Egyptian Ministry of Finance confirmed at the beginning of this year that it is expected that the second and third tranches of the agreement with the International Monetary Fund will be made available after completing the first and second reviews in the first quarter of this year, after obtaining the first tranche in December 2022, at a value of $347 million.
Egypt hopes that the discussions will lead to Egypt obtaining an additional package that will contribute to avoiding the current crisis, and MOODY'S expected that the financing may reach $10 billion, which may contribute to Egypt avoiding resorting to securitization.
Fears of securitization
Egyptian economic expert Dr. Mustafa Badra told CNBC Arabia that securitization is a financial tool used in Egypt and the world and is not new, and that its proposal by the Egyptian government comes within the various economic ideas it is studying with the aim of strengthening the economic situation and ending the current crisis.
Badra considered that its use requires pure investment skill and technical management, capable of exploiting the securitization returns in fruitful projects capable of achieving a return comparable to the returns that were securitized.
He explained that securitization had been proposed in Egypt before, but there were appropriate alternatives for that period, and he denied any risks regarding assets that might be subject to securitization, since Egypt had not defaulted on paying any of its international financial obligations throughout the past periods.
- The dollar crisis in Egypt creates new economic and financial paths
- Securitization comes as a financial security capable of providing large dollar liquidity in a short time
- The Suez Canal may constitute the cornerstone of the idea of securitizing Egyptian assets
- The International Monetary Fund and its support for Egypt may contribute to avoiding securitization