Egypt leads the way for sovereign green bonds in the MENA region
By Seth Owusu-Mante, PhD Candidate
Photo Source: Egypt Independent
Seth Owusu-Mante’s research on Egypt was supported by the Fares Summer Fellowship, 2022.
The task of devising policies to attract private investments for building a low carbon and climate resilience economy has inspired an array of sustainable financing instruments which governments are utilizing to enhance their agendas for sustainable development. Green bonds have thus emerged globally as a viable option to mobilize sustainable finance. In 2020, Egypt became the first country in the Middle East and North Africa (MENA) region to issue a sovereign green bond. Egypt’s success with the region’s first sovereign green bond has positioned the country on the global map as an icon for green and sustainable finance for climate action.
Egypt’s initial target was to raise USD 500 million on a coupon rate of 5.75 percent over a 5-year period. This was met with widespread interest from investors with offers amounting to about USD 3.7 billion. This prompted the Egyptian government to increase its target to USD 750 million and also lower the coupon rate to 5.25 percent. Proceeds from the bonds have been duly utilized to fund a portfolio of climate smart initiatives including projects in clean transportation, sustainable water, and wastewater management.
About 46 percent of the proceeds amounting to USD 347 million was invested in the Cairo monorail project. The fully automated and driverless Cairo monorail will offer a fast, modern, safe, pollution free, and environmentally friendly means of transportation for over 45 thousand passengers per hour for each of the two directions for the monorail. In addition to earning the title as the world’s longest monorail upon completion, it will become the first, most effective, and clean public transportation vehicle connecting Egypt’s New Administrative Capital to the rest of Cairo. The remaining USD 403 million was utilized to support several climate adaptation projects across the country. These included investments for wastewater reuse for irrigation and projects to desalinate seawater to meet the drinking water needs of the country from 2020 to 2050.
Beyond the government’s commitment to guide the country towards a climate resilient development path, the green bonds offered the opportunity for Egypt to diversify its investor base for government securities. As of 2020, domestic debt accounted for about 70 percent of Egypt’s sovereign debt. The domestic creditors are dominated by commercial banks. These banks are mostly interested in short term debt securities like treasury bills which places a lot of fiscal pressure on the Egyptian government. The government’s ability to successfully mobilize funds from the international capital market through green bonds was an indication of achieving its medium-term debt strategy which seeks to diversify the investor base for government securities, develop a market for treasury bonds, and lengthen the average maturity of government debt.
Importantly, Egypt’s success with the MENA region’s first sovereign green bond validated the confidence of foreign investors and the international community in the Egyptian economy. Egypt had made impressive macro-economic gains pre-covid and was able to maintain its robust economic credentials and fiscal discipline during the pandemic. The over subscription of Egypt’s green bonds by a diverse group of investors including asset management companies, pension funds, insurance companies, bank treasuries, private banks, hedge funds and a host of others confirms the positive image and confidence investors have in Egypt despite the global economic hardship faced by some developing economies as a result of the covid-19 pandemic.
In addition to Egypt’s economic credentials and fiscal discipline, several other factors also accounted for Egypt’s success with green bonds. These include a clear government commitment to be climate proactive, strong understanding of the value of green bonds, widespread stakeholder engagement, and a robust communication strategy adopted in preparation for the issuance of the bond. These factors can be replicated and improved to serve as policy lessons for countries in the MENA region and other developing economies looking for alternative sources of finance for climate action.
