Fitch Ratings lauded the agreement between the Egyptian government and the International Monetary Fund (IMF) in which Egypt secures a $3 billion loan over 46 months.
Fitch Ratings added also said that Egyptian banks’ regulatory capital ratios can withstand further Egyptian pound depreciation as they are supported by healthy internal capital generation.
“Large private-sector banks are better-placed to withstand currency depreciation than the two largest public-sector banks, National Bank of Egypt (NBE) and Banque Misr (BM), due to their higher regulatory capital buffers,” according to Fitch.
It noted that the currency may remain under pressure in 2023 given Egypt’s import backlog, and large gross external funding needs, estimated at over $19 billion for 2023.
“It remains to be seen whether the Central Bank of Egypt will let the exchange rate and interest rates adjust sufficiently to attract new portfolio flows.”
“The introduction of certificates of deposit this month paying 25 percent interest will squeeze NBE’s and BM’s net interest margins, while private-sector banks are likely to see further deposit outflows. However, yields on sovereign securities, which increased by more than 500bp in 2022, should underpin private sector banks’ net interest margins and overall profitability metrics.”
Fitch warned that “asset quality risks are increasing as business activity slows due to macroeconomic pressures and FC shortages, but banks’ strong provisioning buffers of large holdings of sovereign securities should mitigate the impact.”
“In 2016 depreciation helped to boost fiscal revenues while eroding spending in real terms. Our baseline assumption is that a similar dynamic will play out in 2023, but less fiscally beneficial outcomes are possible,” according to the report.
“In the near term, the weaker exchange rate and higher interest rates will keep government debt/GDP and the interest/revenue ratio at high levels. Both are well above the medians for the ‘B’ rating category.”
Fitch called on the government to sustain flexible exchange-rate and higher interest rates.