Egypt's current account deficit is expected to expand to five percent of GDP in 2020, up from 3.1 percent in 2019, keeping pressure on foreign reserves that stood at $39.2 billion at the end of August, Fitch Ratings stated.

In a report on Egypt’s Banque Misr credit rating released on Thursday, Fitch expected a sharp slowdown in Egypt’s real GDP growth to 2.5 percent in 2021, well below the average growth of 5.5 percent in 2018 and 2019.

The banking sector's exposure to the most affected trade and services sectors, including tourism, transportation and the Suez Canal, accounted for about 27 percent of the total loans (23 percent of GDP) at the end of 2019, according to Fitch Ratings.

It also expected that lower foreign currency receipts will constrain foreign currencies borrowers' debt service capacity, saying that foreign currency lending accounts for around a quarter of total sector loans.

Measures taken by the Central Bank of Egypt to restructure credit facilities to the distressed tourism sector for three years, along with the six-month credit holiday for corporate and retail borrowers in the sector, are likely to provide some relief but will delay the recognition of impaired/stage 3 loans under IFRS 9 and understate the level of the problem of loans in the sector, according to Fitch Ratings.

Fitch expected banks' stage 3 loans ratio to increase in 2021 as operating conditions will remain challenging.

“Egyptian banks' liquidity positions have stabilised since July 2020, after a period of volatility in March-April 2020, caused by large capital outflows. Some renewed investment portfolio inflows reported since July and the sovereign's external borrowings have supported the sector's foreign currency liquidity.

However, a sustainable improvement would require the return of the country's core foreign currency receipts, including remittances from Egyptian expats, tourism receipts, Suez Canal revenues, which all are contingent on external economic factors.

Fitch also expected that risks to Egyptian banks' operating environment will remain high over the medium term, suggesting further pressures on banks' financial metrics are likely.

Accordingly, Fitch's outlook for the operating environment remains negative, yet the near-term risks to Egyptian banks' credit profiles and risks to their foreign-currency funding and liquidity because of the COVID-19 crisis are receding.

Fitch has kept Banque Misr’s B+ rating with a stable outlook.

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