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Sunday, 11 April 2021

Egypt’s economic growth to slow to 3% in 2021, banking system faces challenges: Fitch Ratings

On the banking system, Egyptian banks face asset-quality deterioration and continued pressure on profitability through 2021 driven by the economic fallout from the pandemic, according to the report

Doaa A.Moneim , Wednesday 7 Apr 2021
Fitch Ratings
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Egypt’s economic growth is projected to slow to 3 percent through the end of the current FY2020/2021 (ends in June), down from 5.6 percent in FY20192020 due to the negative impact on key sectors, including tourism, trade, transportation and the Suez Canal, which represent around 23 percent of GDP, Fitch Ratings said in a report released on Wednesday.

On the other hand, less stringent lockdown measures than those in other jurisdictions as well as higher public investment and infrastructure spending have underpinned growth, according to the report.

On the banking system, Egyptian banks face asset-quality deterioration and continued pressure on profitability through 2021 driven by the economic fallout from the pandemic, according to the report.

Capitalisation through the banking system remains a credit weakness and foreign-currency liquidity is still vulnerable to external shocks, according to the report.

On the other hand, the report said that the sector could benefit from growth and revenue opportunities, with Egypt’s lockdowns less stringent than those in many jurisdictions, and consumer consumption and public investment more resilient.

The report also noted that Egypt’s banking sector’s average Stage 3 loans ratio was stable at 3.4 percent at the end of the third quarter pf 2020, supported by the Central Bank of Egypt’s (CBE) significant interest rate cuts to boost lending, a six-month deferral of loan repayments and flexibility on how banks classify loans.

“However, we believe these measures have delayed rather than prevented asset-quality deterioration,” said the report.

It also expected the sector average Stage 3 loans ratio to increase to about 4 percent by end of 2021.

However, the key indicators of asset-quality pressures are expected to be a higher level of restructured exposures and migration of Stage 1 loans to Stage 2, according to the report.

“Ratios of Stage 2 loans vary significantly among banks, largely due to some banks more proactively front-loading their provisions by classifying performing loans as Stage 2 despite forbearance measures,” the report explained.

The report expected continued pressure on banks’ operating profitability owing to the lower interest rates and higher loan impairment charges as borrower support measures end.

It added that such projection is not expected to cause a capital erosion, but capitalisation remains a credit weakness given banks’ high exposure to the sovereign and large individual obligors.

Moreover, regulatory capital ratios are inflated by the zero risk-weighting on local-currency sovereign debt, according the report.

For the foreign currency liquidity, the report pointed out that it has recovered from the large sell-offs and portfolio outflows in March and April 2020 but remains vulnerable to foreign investors’ confidence in emerging-market debt and exchange-rate fluctuations.

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