Dubai: The key performance matrix of Egypt’s banking sector shows that bank fundamentals have improved this year compared to most emerging economies.

Data from the Institute of International Finance (IIF) reveals that the average capital adequacy ratio had improved, with the Tier-1 capital ratio increasing to 12.6 per cent at the end of June 2018, well above the regulatory minimum. The non-performing loan (NPL) ratio continued its decline to 4.3 per cent, partly due to NPL write-offs.

Bank profitability, while moderating, is adequate enough to more than offset a possible increase in credit risk costs.

Analysts say funding risks on average remain low with Egyptian lenders having one of the lowest loan-to-deposit ratios among emerging economies.

Despite international markets having become more volatile, in addition to higher risk premiums for a broad range of emerging markets, including Egypt, that have made external funding expensive, Egyptian lenders remain better off in relative terms.

“Egypt is different from Turkey. First, Egyptian corporates’ exposure to the international market is negligible as they cover their financing needs from the highly liquid local banks,” said Garbis Iradian, IIF Mena chief economist, said.

“Second, most of the funding of Egyptian banking sector comes from deposits from residents and a loyal Egyptian diaspora.”

Banking sector liquidity is expected to remain strong in the context of relatively low loan growth while the country’s monetary policy is seen remaining accommodative. The country lowered rates by a cumulative 200 basis points (2 per cent) in 2018, and the Central Bank of Egypt (CBE) has now left rates on hold for four consecutive meetings.

Furthermore, the central bank has kept its overnight lending rate at 17.75 per cent since March 2018 to anchor inflation expectations.

“The CBE’s shift towards a more conventional policymaking process, as well as its attempts to tackle high inflation, suggest that a sustained easing cycle remains firmly on the table, with our forecast of a further 275bps of cuts in the overnight deposit and lending rates to 14 per cent and 15 per cent respectively, by the end of 2019,” said Ehsan Khomn, head of Mena Research and Strategy at MUFG.

According to IIF economists, Egypt’s monetary policy faces the problem of managing the trade-off between supporting economic activity and reducing the burden of government interest payments on domestic debt, and on the other hand keeping inflation expectations anchored and attracting adequate non-resident capital flows.

“We believe that keeping key policy rates unchanged remains consistent with achieving the target for headline inflation of 13 per cent in the fourth quarter of 2018 and single digits after the impact of the upward adjustment in fuel and electricity prices fades,” said Jonah Rosenthal, senior analyst at IIF Mena.

Analysts expect once headline inflation declines to below 10 per cent and demand pressures remain contained, the CBE may ease the monetary stance, most likely in 2019.

Decline in inflows

According to the World Bank, about 40 per cent of remittances to Egypt come from Saudi Arabia. Job losses in Saudi Arabia are clearly impacting remittances to the north African country.

Non-resident capital inflows to Egypt are also showing signs of sensitivity to developments across EMs.

The Egyptian equity index, as in other emerging economies, has declined significantly in the past four months, reflecting trade tensions and tighter external financial conditions.

Non-resident capital inflows have declined from a peak of $43 billion (Dh157.93 billion) in the 2017 fiscal year to $27 billion in the 2018 fiscal year, and the IIF expects a further decline to $14 billion in 2019.

“We do not see this trend as a reason for concern, given the ongoing improvement in macroeconomic fundamentals — narrower external deficits and higher official reserves. Moreover, FDI [foreign direct investment] continues to increase, and disbursement of loans from multilateral organisations are adequate,” said Rosenthal.