Fitch: Egyptian bank ratings may face pressure due to decline of foreign assets

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Fitch Ratings issued a report in which it indicated that the rating of Egyptian banks may face pressure if the decline in foreign assets continues.

The agency added that net foreign liabilities in the Egyptian banking sector amounted to $7 billion at the end of last November, compared to net foreign assets of $6.8 billion at the end of last February. It also indicated that this deterioration came due to the decline in foreign assets, explaining that if this downward trend continues, the liquidity of foreign currencies and the ability to meet debt service may be restricted. Egypt’s current account deficit may increase pressure on banks’ foreign exchange assets, it added.

The Central Bank of Egypt revealed in October 2021 that the current account deficit rose during the last fiscal year 2020-2021 due to the decline in the service balance surplus by 42.9 per cent, to be limited to $5.1 billion, compared to $9 billion in the previous fiscal year. The rise in the investment balance deficit by 9.2 per cent, to reach $12.4 billion, compared to $11.4 billion, contributed to the widening of Egypt’s current account deficit in the last fiscal year. According to the report, Egyptian banks could see more pressure on foreign assets if there is a renewed wave of selling by foreign portfolio investors due to rising inflation.

Fitch Ratings estimated that foreign holdings of local currency sovereign securities in Egypt decreased by $2 billion in October 2021, from an all-time high of $34 billion at the end of September 2021, reflecting pressure on net foreign currency liabilities. Last month, the agency suggested the possibility of Egypt again resorting to the International Monetary Fund. Egypt’s dependence on external funds makes it vulnerable to changes in global monetary conditions, it stressed.

The Egyptian economy suffers from a high rate of external debt, while facing a decline in income in hard currencies. According to the Central Bank of Egypt, the external debt increased by $14.3 billion dollars during the last fiscal year, to record $137.85 billion at the end of June 2021, compared to $123.49 billion dollars at the end of June 2020, an increase of 11.57 percent.