Central Bank of Egypt in downtown Cairo. Image Credit: Reuters

Dubai: Significant capital flight from Egypt following the over 15.7 per cent devaluation of its currency last month has become a major worry for UAE banks with subsidiaries in the country.

Earlier this month First Abu Dhabi Bank (FAB), the UAE’s biggest bank, pulled out from a plan to acquire EFG-Hermes, Egypt’s largest investment bank. Investment banking sources said, many foreign direct investment proposals - including M&A deals - in Egypt from the GCC have come to a grinding halt following currency devaluation and massive capital outflows.

Central Bank of Egypt (CBE) data shows net foreign asset (NFA) position decreased a sharp $13.7 billion to negative $5.1 billion in March amid non-resident capital outflows triggered by the Ukraine situation. The capital flight has triggered fear of further currency volatility. In addition, the capital outflows also amplify the domestic market effects of tightening global funding.

“With liquid foreign exchange reserves at $29 billion at the end of March, a similar drawdown of $13.7 billion would reduce the reserve stock to around $15 billion,” said Moody’s in a recent note. “That level would undermine external debt service coverage over the next 12 months, which we estimate at about $30 billion.”

London-based Capital Economics expects the Egyptian pound to fall by another 25 per cent by the end of 2024. “Investors appear to have grown wary of the impact of the weaker currency on Egypt’s foreign exchange government debt, which is equal to around 24 per cent of GDP,” it said.

Risks to banks

Egypt’s banking sector was on a recovery path from last year supported by a strong economic revival that improved profits and asset quality of the subsidiaries of UAE banks in Egypt.

Emirates NBD, First Abu Dhabi Bank (FAB), Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank and Mashreq have subsidiaries in Egypt. Profitability of Egyptian operations had improved significantly over the past few years reflecting the overall improvement in operating conditions. However, with the rising capital flight, currency volatility, inflationary pressures and rising interest rates, banks are expected to face sharp declines in loan growth as non-performing loans are likely to rise.

Inflation and interest rates are likely to spike further. Higher oil and food prices have driven a surge in inflation. Overall consumer prices rose 12 per cent year on year in March.

“We expect price pressures to accelerate further after exchange-rate depreciation in March, lifting overall inflation to 10 per cent in 2022 and 12 per cent in 2023,” rating agency Fitch said in a note. “In our view, the CBE is likely to raise interest rates further to maintain positive real policy rates, tame inflation, and support the Egyptian pound and attractiveness of local-currency assets. We assume a further 300 basis points in rate rise by 2024.”

Reforms and support

The Egyptian economy to get some respite from the current turmoil due to swift international support and strong growth prospects for the economy. GCC countries collectively made $22 billion of commitments to Egypt, and Saudi Arabia made a $5 billion foreign currency deposit to directly buttress Egypt’s foreign exchange reserves, in addition to another $10 billion earmarked for investments. The UAE has committed $2 billion of investments. Egypt is also in discussions with the IMF on a new funding programme.

“We expect it will help fund the wider current account deficit, which we estimate at 5.4 per cent of GDP in fiscal 2022, versus 4.6 per cent in fiscal 2021,” Moody’s said. “Notwithstanding Egypt’s already large borrowings from the IMF at about $19 billion, we expect that the government will be able to access additional funding under the IMF’s Exceptional Access Criteria.”