International credit agency, Moody's, upgraded on Wednesday its outlook for the Egyptian banking system to stable from negative on the back of government recent commitment to fiscal reforms and improving macroeconomic indicators.
Since President Abdel-Fattah El-Sisi took office in June 2014, Egypt has taken to a fiscal reform programme cutting energy subsidies and introducing new taxes, a move that followed three years of political and economic instability.
Egypt's economy grew 5.6 percent in the second half of 2014, while growth in the fiscal year ending June 2015 is expected to register 4.2 percent, shows planning ministry data.
“We expect that Egypt’s banking system will benefit from improved operating conditions, resulting in rising consumer confidence and business investments, which in turn will support loan growth and asset quality”, Melina Skouridou, CFA Moody’s lead analyst for Egyptian banks, said in a press release.
Moody's also projected in a report on the Egyptian banking system that GDP growth would reach 5 percent in the fiscal year ending June 2016.
The upgrade was also driven by the agency's belief that the government will continue to support key banks especially large state-owned banks.
Rising remittances was also a supporting factor in Moody's decision to upgrade.
Egyptian Central Bank data show that remittances from Egyptian abroad rose 10 percent to $14.4 billion in the nine months leading to the end of March compared to the same period a year earlier.
Moody's links banks credit profile to the governments' credit quality, since banks in Egypt are highly exposed to government securities which account for 43 percent of their assets.
However, the report warns that banks' high exposure to government securities could also be a main source of credit risk.