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Moody's says Egypt's pound flotation credit positive, supports economy

On Thursday, the Central Bank of Egypt decided to freely float the pound and raise key interest rates as part of reforms aimed at alleviating a dollar shortage and stabilizing the country's economy

Ahram Online , Tuesday 8 Nov 2016
Moody
Moody's expects the equity-to-assets ratio and the estimated tier 1 capital ratio, that measure the financial health of the banks, to decline by1-2 percent with a 50-percent devaluation of the EGP
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Egypt's decision to float the pound on Thursday is credit positive for Egyptian banks, Global credit rating agency Moody's said in a statement on Monday, adding that the decision would increase the availability of US dollars in the economy.

Last week, the Central Bank of Egypt (CBE) decided to float the pound, allowing local banks to freely set the exchange rate of the EGP against foreign currencies — part of a set of reforms aimed at alleviating a dollar shortage, eradicating the black market and stabilizing the country's flagging economy.

After the CBE decision, local lenders have devalued the EGP against the US dollar by around 45 percent.

In the event of a 50 percent devaluation, Moody's expects equity-to-assets ratios and the estimated tier 1 capital ratios, which measure the financial health of the banks, to decline by 1-2 percent.

The CBE also decided raise key interest rates by 300 basis points. The overnight deposit rate, the overnight lending rate, and CBE's main operation rate have been raised to 14.75 percent, 15.75 percent and 15.25 percent respectively.

Moody’s said in an emailed statement that an "increase in the benchmark rates will support the banks’ profitability given their high exposure to short-term government securities."

Egypt's cabinet announced on Friday that the government would increase the credit on food subsidy cards from EGP 18 to EGP 21 per month, starting in December, to offset the possible negative impacts of the economic reforms.

Minister of Finance Amr El-Garhy said at the time that the move would increase state spending in this category from EGP 44 billion to EGP 50 billion.

The government's reforms are part of an effort to gain International Monetary Fund board approval for a $12 billion loan package to be delivered over three years.

The reforms are also aimed at decreasing Egypt's budget deficit, which currently stands at 12.2 percent of GDP, to less than 10 percent this financial year.
 

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