Banking on Egypt's future: why banks loans to the government are a secure investment

Banking on Egypt's future: why banks loans to the government are a secure investment
2.5 5

Published December 29th, 2013 - 20:54 GMT via SyndiGate.info

Rate Article:

 
PRINT Send Mail
comment (0)
According to Fahmy, the government had to turn to cash in the banks as the country was in a critical situation and the banking sector could help.
According to Fahmy, the government had to turn to cash in the banks as the country was in a critical situation and the banking sector could help.
Follow >
Click here to add A as an alert
A
,
Click here to add Al Ahli United Bank as an alert
Al Ahli United Bank
,
Click here to add Al Baraka as an alert
Al Baraka
,
Click here to add Arab Investment Bank as an alert
Arab Investment Bank
,
Click here to add Bank of Greece as an alert
Bank of Greece
,
Click here to add Bassant Fahmy as an alert
Bassant Fahmy
,
Click here to add Blom Egypt as an alert
Blom Egypt
,
Click here to add Cairo University as an alert
Cairo University
,
Click here to add Central Bank of Egypt as an alert
Central Bank of Egypt
,
Click here to add Egyptian General Petroleum Corporation as an alert
,
Click here to add Egyptian Gulf Bank as an alert
Egyptian Gulf Bank
,
Click here to add Egyptian Radio and Television Union as an alert
,
Click here to add Fakhry El-Feky as an alert
Fakhry El-Feky
,
Click here to add General Authority for Investment as an alert
,
Click here to add Industrial Development as an alert
Industrial Development
,
Click here to add Ministry of Finance as an alert
Ministry of Finance
,
Click here to add Mohamed Morsi as an alert
Mohamed Morsi
,
Click here to add Mohamed Naguib as an alert
Mohamed Naguib
,
Click here to add Morsi’s administration as an alert
Morsi’s administration
,
Click here to add Mostafa as an alert
Mostafa
,
Click here to add National Bank of Greece as an alert
National Bank of Greece
,
Click here to add New and Renewable Energy Authority as an alert
,
Click here to add Piraeus Egypt as an alert
Piraeus Egypt
,
Click here to add Postal Authority as an alert
Postal Authority
,
Click here to add Societe Arabe Internationale De Banque as an alert
,
Click here to add Standard as an alert
Standard
,
Click here to add Standard and Poor as an alert
Standard and Poor
,
Click here to add Workers Bank as an alert
Workers Bank

Given the expansive fiscal policy the current interim government is implementing, some public authorities are still suffering from financial deficiencies. The banking sector has been a source for filling this financial gap and one of the most stable financial tools, particularly after the economic turmoil plaguing the country following the January 2011 Revolution.

Last week, thirteen banks have announced the completion of an EGP 2bn syndicated loan for the Egyptian General Petroleum Corporation (EGPC), a public authority, to meet its “internal and external needs” and secure the continuous supply of petroleum products for the local market.

The deal is a contribution from the banking sector to revive the petroleum sector, said Chairman of Société Arabe Internationale De Banque (SAIB) Mohamed Naguib during a press conference held after the signing last Tuesday, noting that the banking sector has been the strongest sector in Egypt during the past ten years.

CFO of Elsewedy Electric Company Alaa Mostafa said that giving loans to public authorities has always been a secured investment for banks, adding that the sector has a large amount of funding “which it has to use anyway”. Mostafa, who is also a finance professor, noted that the EGPC is an established borrower and is creditworthy and thus eligible to receive loans from banks.

Echoing this view is economic and banking expert Bassant Fahmy, who said that the EGPC is a “strong entity” with several sources of funding. “If the authority hadn’t obtained the loan from banks, it would have faced a difficulty in importing energy which the country badly needs,” Fahmy added.

The bank consortium, with SAIB acting as both the Mandated Lead Arranger and the major participating bank, includes Al Ahli United Bank, Bank Audi, Egyptian Arab Land Bank, Egyptian Gulf Bank, Faisal Islamic Bank, Blom Egypt, Arab Bank, Arab Investment Bank, Piraeus Egypt, Industrial Development and Workers Bank, Al Baraka Islamic Bank and the National Bank of Greece.

The government’s cost of borrowing from banks has been reduced by 4% as a result of the Central bank of Egypt (CBE) cutting interest rates, bringing them to the lowest level since January 2011. According to analysts, every 1% reduction saves around EGP 1bn for the government.The CBE has cut interest rates three times since September by 150 basis points in total, most recently on 5 December when it unexpectedly lowered rates after keeping them unchanged in November, which was seen by analysts a means of curbing inflation.

Fahmy stated that giving loans to public authorities is deemed an “indirect government loan”; however, she stressed that banks are providing loans only to established borrowers.According to statistics released by the Ministry of Finance, the government borrowed more in July than it had previously in the last three years. The total value of treasury bonds, an interest bearing IOU issued by the government, registered EGP 81.5bn in July compared to EGP 54.5m and 47.5m in May and June, respectively.

Treasury bonds are considered safe investments for banks because they are guaranteed by the government. In July 2012 the government borrowed upwards of EGP 71bn, while net domestic borrowing in July 2011 totalled EGP 35bn. In July 2010, the numbers totalled EGP 45bn.

Meanwhile, public authorities suffered losses of EGP 10bn during the 2012/2013 fiscal year. The government’s financial bodies received around EGP 3.4bn in terms of financing from the government; however, their total revenues registered EGP 108bn, representing only 91% of the targeted figure.

There are 51 financial bodies in Egypt which include printing presses, land and maritime ports, the Egyptian Radio and Television Union (ERTU), General Authority for Investment (GAFI), EGPC, Postal Authority, New and Renewable Energy Authority (NREA) and the Egyptian National Railways (ENR).

There are various methods the government can use to finance its authorities. Before the January 2011 Revolution, the government sometimes resorted to selling its assets when in need of funding. This has become difficult since 2011, as there is a strong public sentiment against privatisation.During the period of former president Mohamed Morsi, sukuk had been deemed a financial tool which would help achieve large gains, according to the principles of Islamic Sharia. However, it is not preferred currently and has faced widespread criticism during Morsi’s administration for being “a political tool rather than an economic one”.

In the meantime, narrowing the budget deficit will reduce the government’s request for funds, Fakhry El-Feky, an economy professor at Cairo University, said in November. He added that this creates space for the private sector to borrow from banks. The government expected the budget deficit to reach 10% of GDP in the fiscal budget of 2013/2014, which is about EGP 186bn, a fall from EGP 204.9bn recorded in the first 11 months of the 2012/2013 fiscal year.

International rating agency Standard and Poor’s (S&P) had said two months ago that they believed it would be difficult for Egypt to rely upon increased tax revenues for fund spending. They estimated the GDP per capita in 2013 at $3200, which is too low to provide sufficient tax revenue.Total revenues for the current fiscal year are expected to reach EGP 505.5bn, a report from Ministry of Finance has earlier showed, with tax revenues amounting to EGP 358.7bn, non-tax revenues to EGP 146.8bn and other revenues to EGP 144.4bn. While it is expected that total expenditure will reach EGP 689.3bn, EGP 171.2bn of which will spent on wages and workers compensation.

With regards to financing the government’s stimulus package, it will use a $9bn (EGP 60bn) deposit from CBE, according to Galal. The interim cabinet had adopted its first economic stimulus package in August, which had aimed to create a 3% growth rate over the current fiscal year and rein in the 13.8% GDP budget deficit to 10%. The package includes investments focused on developing infrastructure, which Galal said is pivotal to supporting the economy and private sector growth.

According to Fahmy, the government had to turn to cash in the banks as the country was in a critical situation and the banking sector could help. “This was a better solution than printing more cash because this would have led to an increase in the inflation rates,” she said.

Mostafa stated that the granting of loans to governmental bodies may be “politically motivated”; however, he noted that all bank portfolios have allocations for such loans.

Advertisement

© Daily NewsEgypt 2013

Add a new comment

 avatar