The persistent low economic growth, coupled with the currency devaluation and continued lack of public confidence in the Egyptian pound, hurts the performance and prospects for most Egyptian banks and complicates the government's efforts to reform the public sector banks, according to a recent Banking System Outlook report by Moody's Investors Service .
"Amplified provisioning requirements and devaluation-related accounting losses have depressed many banks’ earning power," says Moody's Senior V/P and author of the new report, Mardig Haladjian. "The increased burden of non-performing loans has almost paralyzed some banks and led them into curbing fresh lending activity. Loans to public sector companies remain the most problematic, while the fortunes of many previously strong import-dependent industries have reversed due to the effects of the currency devaluation," the analyst continues.
On the other hand, Moody's notes that the sharp devaluation of the Egyptian pound has somewhat improved the prospects for tourism and export-related companies, which are showing signs of recovery. Meanwhile, all banks continue to chase opportunities in retail lending, but Moody's believes that this newly developing sector, in a depressed economic environment, hides risks for over-zealous bankers.
Furthermore, based on the government's intended adoption of an inflation-targeting monetary policy, the ratings agency expects interest rates to rise for the short- to medium term, thus further pressuring banks' asset quality.
Moody's notes that the difficult economic conditions, coupled with increased capital and other prudential requirements brought about by the new banking law, are particularly pressuring the small banks, some of which may not survive on their own. It is likely that, should there be a need, the large public sector banks will be called upon to absorb frail small banks. "These developments support Moody's belief that there is now increased systemic risk for the Egyptian financial sector, thus focusing attention on systemic support considerations," Haladjian cautions.
Moody's believes that the authorities' willingness to provide systemic support remains strong, but considers that ability and timeliness are less certain.
On a positive note, tourism flows have been recovering and may gradually help ease the shortages in foreign currency. "The recovery signs in tourism arrivals are encouraging, but we believe that there needs to be a significant and sustained rebound in tourism and foreign investment for the stagnant economy to get moving again and improve the business environment for the banks," says Haladjian. "Unless there are sustained improvements in reforming the economy and the banking system, we believe negative pressures on the banks' ratings will continue to mount," the analyst concludes. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
