Fitch Ratings-London: Egyptian banks’ Viability Ratings (VRs) could come under pressure if the banks’ foreign assets continue to drop, Fitch Ratings says.
The sector had a net foreign liabilities (NFL) position of EGP112 billion (USD7 billion) at end-November 2021, according to Central Bank of Egypt (CBE) data, compared with a net foreign assets position of EGP107 billion at end-February 2021. The deterioration was mainly driven by declining foreign assets. If the trend continues, the banks’ foreign-currency (FC) liquidity and debt service capacity could be constrained.
The sector’s NFL were even wider at end-November 2021 than immediately after the surge of capital outflows in April 2020 at the start of the Covid-19 pandemic. The deterioration in February-November 2021 was driven by a drawdown of foreign assets despite a strong recovery in foreign portfolio balances, which had increased to USD32 billion at end-October 2021 from a low of USD7 billion at end-April 2020.
The sector's FC lending increased modestly, which does not fully explain the drawdown on FC assets. We believe the drawdown may have been partly due to foreign assets being used to help meet the CBE’s external debt obligations as the CBE drew down on some of its FC deposits at domestic banks. At end-July 2021, the CBE had USD6.8 billion maturing in three months or less, including USD3 billion of Saudi deposits that were subsequently renewed. Egypt’s ongoing current account deficit may have added to the pressure on banks’ foreign assets.
In contrast to the pressure on banks’ foreign assets, the CBE’s official FC reserves gradually strengthened to USD40 billion at end-November 2021 from USD37 billion at end-June 2020, supported by the return of non-resident investments, the issuance of a USD3 billion Eurobond and Egypt’s USD3 billion special drawing rights allocation from the IMF in August 2021. Link to Infogram: Central Bank of Egypt's Foreign-Currency Reserves The CBE’s other FC deposits (not included in official reserves) increased more significantly – to about USD11 billion at end-November 2021 from about USD4 billion at end-June 2020. These are placed with local banks and are used by the CBE as a Tier 2 reserve to offset the impact of external outflows on headline reserves.
Egyptian banks’ balance sheets are not highly dollarised (we estimate FC liabilities account for less than 20% of sector liabilities) and are well matched by currency. The sector’s net short FC position was only 2.2% of capital at end-September 2021, well below the CBE’s cap of 20%, and the average FC loans-to-deposits ratio was comfortable at 72%. However, we believe the stock of foreign assets is a better indicator of the sector’s FC liquidity as these are largely short-term placements with foreign banks and can be easily liquidated when needed. The coverage of FC debt obligations by foreign assets was 24% at end-September 2021, down from 33% at end-2020, and is likely to have dropped further by end-November 2021.
Further pressure on banks’ foreign assets could develop if there is a renewed wave of sell-offs by foreign portfolio investors due to higher inflation eroding the carry trade on sovereign securities or a flight to quality away from emerging market debt triggered by Fed tapering and rising US yields. Foreign holdings of local-currency sovereign securities dropped by USD2 billion in October 2021 from an all-time high of USD34 billion at end-September 2021, partially explaining the continued pressure on banks’ NFL positions.
Egyptian banks’ funding and liquidity scores, and ultimately their VRs, could come under pressure if FC liquidity tightens further. This is particularly the case for public sector banks as they are the main providers of FC for the government and public sector.
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Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email: louisa.williams@thefitchgroup.com
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com . All opinions expressed are those of Fitch Ratings.
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