Egyptian banking sector's net foreign assets have recovered from the lows it had witnessed because of the COVID-19 crisis, driven by the return of foreign inflows to Egyptian capital markets, according to Fitch Ratings.

In recent insights, released on Tuesday, Fitch Ratings said that the sector's net foreign assets turned mildly positive as of September and October, marking a sustained improvement since the low of negative $5.3 billion in April when global financial markets volatility incurred $17 billion of capital outflows.

While Egypt's positive Carry trade is attractive to oversea investors, foreign currency (FC) liquidity remains vulnerable to investors' confidence and exchange-rate fluctuation risks.

In addition, banks' higher reliance on external borrowings to boost their FC liquidity also poses some refinancing risks, according to Fitch Ratings.

Meanwhile, foreign holdings of Egyptian Treasury bills (T-bills) recovered to $13.4 billion at end-August, up from the $7 billion in May, supported by a stable exchange rate and high yields despite the four percent (400 bps) of rate cuts introduced by the Central Bank of Egypt (CBE) over 2020, according to Fitch Ratings.

Fitch Ratings also said that Inflation-adjusted rates of return on Egyptian debt are among the highest in emerging markets due to the steep drop in inflation to 5.7 percent in November 2020, down from over 30 percent in 2017.

“While there may be room for some further reduction in the policy rate if inflation remains around the current level, we believe the CBE would seek to maintain real positive interest rates to retain inflows given uncertainties over the recovery in current account receipts”, said Fitch Ratings.

On the country’s FC liquidity, the insights also said that it had boosted as well in the third quarter of 2020 driven by the ministry of finance raising a $2 billion syndicated one-year loan from regional and international banks as well as the issuing of $750 million green bonds in September, which was almost five times oversubscribed.

“In response to FC liquidity pressures, banks have boosted their borrowings from multilateral development banks and international commercial banks to diversify their funding mix, with a focus on longer tenors to lengthen their maturity profile. The sector's foreign assets had increased to $21 billion by end-October, almost in line with those in February,” added Fitch Ratings.

Yet, the insights disclosed that net foreign assets were contracted to only $2.9 billion down from $7.3 billion at end-February, due to a 21 percent increase in foreign liabilities (to $18 billion) from January to October 2020.

“This poses some repayment risks as banks' debt-servicing capacity could be pressured in the event of another sell-off by foreign investors that results in banks drawing down on their foreign assets.

However, about 70 percent of banks' external debt is long-term, which reduces short-term refinancing risks. The sector's net foreign assets [are] covered only by seven percent of domestic FC deposits at end-October, down from [the] 18 percent at end-February,” said Fitch.

It also added that near-term risks to Egyptian banks FC funding and liquidity profiles due to the fallout from the pandemic crisis are receding.