CAIRO: Moody’s on Tuesday revised its outlook on Egypt’s banking system to negative from stable, citing growing exposure to lower-rated Egyptian sovereign debt and the effect of political turmoil on the economy.
The ratings agency said it expected a decline in tourism, foreign direct investment, incoming fund flows and private consumption in the wake of political unrest would reduce Egypt’s economic growth to around 2 percent in the next 12 to 18 months.
"These adverse economic conditions are likely to challenge the banking system’s asset quality and business prospects as well as its profitability and internal capital-generation capacity," Moody’s wrote.
It said the exposure of Egyptian banks to sovereign debt was a high 26 percent of banking sector assets and was likely to rise further as the government turned to banks to finance its growing deficit.
Hisham Ramez, deputy governor of the central bank, however, said the banking sector remained in good shape.
"Our view of the banking sector is very positive, and its position is very stable and strong," he told Al Arabiya television. "I don’t agree that there are any negative expectations for the banking sector."
Mass protests ended president Hosni Mubarak’s 30-year rule in February. Egypt is currently ruled by a military council which will remain in power until parliamentary and presidential elections are held later this year.
The central bank said on Monday it had ordered the country’s lenders to carry out stress tests on their loan portfolios and would let borrowers postpone debt repayments in the wake of the political upheaval.
The decisions were part of its efforts to support banks and contain any losses that may hurt their performance and the soundness of their credit, it said.
Moody’s said Egyptian banks had shown they had a resilient customer deposit base, but warned this could change if an effective government wasn’t soon elected.
On March 21, Moody’s downgraded five Egyptian banks and assigned them a negative outlook.
On March 16, it downgraded the country’s sovereign debt rating by one notch to Ba3 with a negative outlook because of political and economic instability after the unrest that toppled Mubarak.
