The amendments passed by Egypt’s parliament last week to the Capital Markets Law are credit positive for banks, announced credit rating agency Moody’s in a report on Monday.
The agency says the amendments make the country more appealing for foreign investors, highlighting the “facilitation of sukuk issuance [bonds that generate returns in a way that complies with Islamic Sharia] and investors’ ability to hedge.”
A hedge is an investment that reduces the risk posed by an asset’s price changes, such as using futures contracts.
Futures contracts are used to hedge risks, as they consist of two parties agreeing to trade an asset at a time in the future at a determined price.
Amendments to the law include the introduction of futures trading, a commodities exchange, increasing penalties for financial crimes, establishing privately-owned stock exchanges, and the reduction of listing fees to 0.002% from 0.005% to help small and medium enterprises find new sources of funding by listing on exchanges.
“The amendment is credit positive for banks because the increased capital markets activity will raise banks’ income from their debt capital markets business while also providing funding options,” Moody’s said.
The main sources of funding for banks are deposits, which represented 71% of non-equity liabilities for banks as of last October.
“Furthermore, the income banks earn from their debt capital markets activity will increase, diversifying their operating income, which is heavily reliant on interest income earned from investment in government bonds,” the report reads.
“As of October 2017, government bill and bond investments accounted for 31% of banking system assets and contributed more than 41% to banks’ interest income,” the report adds.
The law is expected to boost the competitiveness of Egypt's economy and to support the non-banking financial sector to achieve financial inclusion, Investment Minister Sahar Nasr said last week.
Moody’s had affirmed in Egypt's long-term issuer and senior unsecured bond ratings at B3, maintaining a stable outlook, last August.
Egypt’s rating has been unchanged since then, given the country's high debt levels.