Financing from the International Monetary Fund and a successful eurobond issue look sufficient to ward off the “Sword of Damocles” hanging over the Egyptian pound. In this second part of our series on the impact of COVID-19 on Egypt, we examine if its reserves are strong enough to prevent a currency crisis.
This is part 1 of a series.
Egypt’s economy has been shaken up many times since the ousting of its long-time president Hosni Mubarak in 2011. Since then, the internal political situation has taken time to stabilise and with that the economic programmes aimed at bringing the country to speed and functioning at its potential.
The Egyptian economy grew on average at 5% in the decade leading to 2011. Although its growth was diversified, it lacked inclusiveness.
The country’s economic growth remains relatively diversified with agriculture making up 15% of its GDP during the fiscal years of 2013/2014, services at 45% and industry at 40%. Its financial sector has long been a beacon of stability and well-performing institutions as a result of reforms implemented by the government over the past years notes the AfDB.
But when an event like a global pandemic comes along, how resilient is it?
“The economic slowdown will have adverse consequences on banks’ asset quality, but Egyptian banks have the capacity to weather the situation,” says Pascal Devaux, senior economist for the Middle East and North Africa at BNP Paribas in Paris.
Exposure to the private sector makes up only about a third of Egyptian bank assets, with the rest made up by public debt and other liquid assets, he says. Devaux’s research argues that the coming deterioration in Egypt’s public finances is sustainable, and that the government will be able to manage a temporary downturn in international demand for Egyptian debt.
- Egypt’s central bank in March set a moratorium on interest and principal repayments on all loans from banks for six months.
- Interest on loans continues to accrue during the moratorium and will be repayable later.
- The banks are strong enough to withstand the impact, says Devaux, who expects banking liquidity to remain adequate.
- According to the Economist Intelligence Unit (EIU), low levels of private sector lending means that Egyptian banks have healthy asset quality. The non-performing loan (NPL) ratio stood at 4.2% of total loans at the end of 2019.
The priority lies in getting Egyptian banks to lend to small business.
The central bank in 2016 required all banks to set aside 20% of their loan portfolios for small and medium-sized companies (SMEs). Yet the banks have continued to hold large portfolios of government securities, with sovereign debt accounting for one-third of banking sector assets as of October 2019.
- According to a survey by Cairo University researchers in 2019, the vast majority of Egyptian start-ups are still launched without external capital. Only 3.2% of businesses begin life with a business loan.
- “The scale of the problem is astonishing,” given the length of time for which Egyptian and international policymakers have focused on the issue, Sciences Po economists Benedikt Barthelmess and Jean Langlois write for The Middle East Institute.
Efforts to stimulate lending to small business continue.
In May, QNB Alahli, Egypt’s second-largest private bank, got a loan of $100mn from the European Bank for Reconstruction and Development (EBRD), to be lent to businesses most affected by the pandemic, especially SMEs. The EBRD also raised QNB Alahi’s limit under its Trade Facilitation Programme by $100mn to $250mn.
By themselves, it’s hard to see how those steps will do anything other than maintain the status quo.
- Between 2011 and 2019, Barthelmess and Langlois calculate that development banks extended credit lines worth around $4b to Egyptian banks – money that was supposed to then be lent to SMEs.
- In most cases, development lenders are “merely extending credit lines to local banks along with some technical advice,” according to Barthelmess and Langlois. They usually have “very little oversight of the beneficiary banks’ ultimate lending decisions.”
- Government initiatives are also ineffective. The economists argue that the very broad definition of SMEs used by the government is deliberate, and allows more than 90% of Egyptian companies to be included.
Bottom line: Pumping money into Egyptian banks will do little to stimulate the real economy until there is concrete oversight as to how the money is lent.
Click here for part 2.
Click here for part 3.
Click here for part 4.
Click here for part 5.
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