Fitch Ratings has revised its outlook on the Egyptian banking sector’s operating environment to stable in August, from negative in July, driven by the improvement in foreign currency liquidity.
Additionally, the revision of Egypt’s outlook reflects healthy prospects for the country’s economic growth, Fitch said.
Accordingly, Fitch projected Egypt’s real GDP growth to accelerate to 6 percent in the current FY2021/2022, up from 3 percent in FY2020/2021.
It added that loan growth recorded 6 percent in the first quarter of 2021 after a strong increase of 31 percent in 2020, driven by the Egyptian authorities’ initiatives to support lending to small and medium-sized enterprises and certain sectors at subsidised interest rates.
In this respect, Fitch expected low double-digit loan growth for Egypt in 2021, with an acceleration in 2022 on the back of low interest rates, recovering economic growth, and higher foreign investments.
Fitch said that Egypt’s banking system had net foreign assets amounting to $1.7 billion by the end of June 2021; a marked improvement from the net foreign liabilities worth $5.3 billion it had accumulated by the end of April 2020, when foreign investors sold their holdings of local currency government securities at the onset of the pandemic, causing $17 billion of portfolio outflows.
It added that pressures on the Egyptian banks’ credit profiles and viability ratings have eased after improvements to the operating environment were made by the end of the third quarter of 2020.
On Egypt’s foreign currency liquidity, Fitch said it increased to $29 billion by the end of May 2021 from the $10 billion recorded at the end of June 2020.
It also noted that the government issued $4.55 billion of Eurobonds between September 2020 and February 2021.
Fitch said that the $5.4 billion loan Egypt secured from the International Monetary Fund under the Stand-By Arrangement Facility helped the state restore investors’ confidence.
Moreover, remittances inflows to Egypt were also resilient in 2020, increasing by 10 percent Y-o-Y to post $30 billion.
However, Fitch noted that the banking sector’s net foreign assets — worth $1.7 billion by the end of June 2021 — were still below pre-pandemic levels, which recorded $7.3 billion at the end of February 2020.
Fitch attributed that to higher foreign liabilities, as banks expanded in borrowing from international development finance institutions to support their foreign currency liquidity.
This poses some repayment risks, as banks’ debt servicing capacities are likely to come under renewed pressure from another wave of selloffs by foreign investors.
On the plus side, banks’ asset quality has been resilient despite the severe impact the pandemic has had on the trade, textile, and tourism sectors, according to Fitch.
“Deterioration in loan quality following the expiry of the six-month credit moratorium in September 2020 has been largely contained. The sector’s Stage 3 loans ratio was stable at 3.4 percent at the end of the third quarter of 2020, although the Stage 2 loans ratio varied significantly among banks, ranging from 2 percent to more than 30 percent,” Fitch elaborated.