International credit ratings agency Moody’s Investors Service has changed the outlook for Egypt’s banking system from negative to stable, the agency announced on Wednesday.
The upgrade confirms Moody’s expectations that bank funding and liquidity will “remain strong”, whilst improving operating conditions over the next 12-18 months.
“We expect that Egypt’s banking system will benefit from improved operating conditions, resulting in rising consumer confidence and business investments, which in turn will support loan growth and asset quality,” said Melina Skouridou, CFA Moody’s lead analyst for Egyptian banks in a statement.
Egyptian banking expert Bassant Fahmy told Daily News Egypt that this move will increase confidence in the Egyptian banking sector when dealing with international institutions.
Fahmy said the upgrade came after the positive performance of banks over the previous period.
She also noted that it will affect the bank’s funding ability, and expects other ratings agencies, such as Fitch and Standard & Poor’s, may follow in the same steps.
The ratings agency forecasts that the increase in the GDP growth, which is expected to reach 5% in the current fiscal year compared to 4.5% for fiscal year (FY) 2015/2016, will be fuelled by giant government-led infrastructure projects, increase in foreign direct investment (FDI), and hike in tourism rates.
Strength of the domestic economy and improvements in the performance of restructured loans will contribute to the improvement in the asset quality of Egyptian banks, according to Moody’s.
“However, capital buffers will continue to be pressured, in Moody’s view, owing to the banks’ large holdings of local-currency government bonds which are zero risk-weighted in the calculation of capital buffers under the domestic regulatory framework,” the rating agency stated.
In May, Moody’s provided a B3 counterparty risk assessment to the National Bank of Egypt (NBE), Banque du Caire and Banque Misr.
The first positive achievement for Egypt after Moody’s decreased the Egyptian credit five times successively following the 25 January Revolution came in April, when Moody’s raised the country’s credit rating to B3. Moody’s also estimated a decrease in Egypt’s budget deficit to 10% of GDP, and a decrease in public debt to less than 90% of GDP in FY 2014/2015.
Moody’s explained that the forecast for local and foreign investments increased especially after the recent Economic Summit, where Gulf States declared support. This came in addition to the announcement of the signing of FDI worth approximately $38bn, which reduces the risks of the balance of payments.