The beginning of the year 2023 was burdened with difficult economic conditions due to the Russian-Ukrainian crisis. The year began without any signs of a solution or reduction of those geopolitical tensions. As the state of uncertainty and the failure of the great powers to adapt to a multipolar world system continue, we will live in a very turbulent world accompanied by sharp economic events.
It is likely that the first half of the year will be somewhat volatile, after global markets suffered their largest decline since the global financial crisis of 2008. This hypothesis is reinforced by the emergence of global indicators accompanied by very low growth expectations for all international economies for 2023. As the global inflation rates continue to increase for at least two consecutive quarters of 2023, the risk of stagflation looms.
Based on the foregoing, the future of the global economy for 2023 depends on the extent of the continuation of the state of uncertainty, given the continuing repercussions of the Russian-Ukrainian crisis. Here we find ourselves facing the biggest challenges of all, which is how to address the crisis of the basic costs of living and ensure the achievement of food security. Thus, it is necessary to adopt a strategy for setting priorities, which will determine the economic and financial policies during the coming period.
With further study and analysis of the Egyptian economy, it is expected that the local currency will remain under pressure in 2023, given the volume of imports, in addition to the debt service burdens of foreign loans.
It remains to be seen whether the Central Bank of Egypt will allow the exchange rate and interest rates to adjust enough to attract new foreign inflows.
This risk is being limited by the growth of Egyptian exports, including the output of the agricultural sector and the natural gas sector, in addition to the Central Bank launching the Egyptian pound index against the basket of currencies and gold, as well as the start of activating the accession agreement to the New Development Bank, which helps to provide more foreign currency earnings, which reduces relative pressure on foreign reserves.
Based on the aforementioned indicators, and in addition to the modern methodology followed by the Central Bank of Egypt recently, I expect Egyptian banks to withstand the depreciation of the Egyptian pound.
This is due to the fact that the regulatory capital ratios of Egyptian banks are supported by the generation of sound internal capital, and the stability of the banking sector also supports the expected relative improvement in the Egyptian economic situation during 2023, and reinforces the foundations of expectations on which it was based, reports issued by & Fitch Ratings Moody’s.
In the same context, Egyptian banks enjoy continued flexibility regarding the performance of loans and credit facilities, as well as the large deposit base of customers, which enabled them to support the economy in the face of the two problems of inflation and the shortage of foreign currency.
Hence, there are vital roles for the banking sector of great importance that must increase during the coming period, and they are represented in the following:
Financial derivatives operations
In 2023, Egyptian banks will start activating risk hedging tools, through the issuance of regulatory controls by the Central Bank of Egypt for the use of financial derivatives operations in the exchange market. This aims to provide an integrated financial service that allows bank customers to hedge against the risks of fluctuations in exchange rates and commodity prices, and these financial derivatives are represented in IRS, SWAPS, Options, FWD, and NDF.
The effectiveness of these financial derivatives is supported by the large increase in banks’ foreign exchange profits, whether from the local market or from remittances from Egyptians abroad, as well as from the tourism sector, as well as the entry of foreign investors into the Egyptian market has been monitored in the recent period.
Financial technology and digital transformation
Expectations of more concerted efforts by the government and the Central Bank of Egypt regarding digital maturity based on the production, collection and protection of data, leading to the emergence of new markets and job opportunities across economic sectors, including banking services. Also, raising awareness and introducing beneficiaries and introducing beneficiaries to the areas in which generate sustainable income and help people improve their financial situation, and data will become one of the basic assets and competitive advantage for any country in the development and growth of its economy.
Agricultural sector and related industries
Expectations of a jump and increase in Egypt’s exports of fruits and vegetables in 2023 enhance the ability of banks to expand in the provision of credit financing for the agricultural sector. It is a good motive for expanding production volumes and these expectations are based on the fact that Egypt is one of the 25 largest exporters of fruits and vegetables, and these exports allow it to obtain the necessary foreign currency revenues to ensure the import of food grains and fodder.
Areas of sustainable development
The Central Bank of Egypt issued instructions for banks to establish credit and risk departments to enhance the ability to provide credit facilities for sustainable development projects during 2023. These include, for example, projects to transform from traditional irrigation systems to modern irrigation systems, electricity generation through solar energy cells and wind energy, and production of green hydrogen as a fuel in preparation for reducing carbon emissions of fossil fuels. Through the participation of the banking sector in financing those new qualitative projects, it will reflect positively on the outputs of the national economy.
In the end, I would like to stress the necessity of continuing to pursue reforms, including strengthening trade policy and facilities as well as improvements in the broader business environment, while unleashing the potential of the private sector in higher value-added and export-oriented activities, which works to provide more job opportunities.
There is also a need to improve living standards, continue offering social relief packages, such as the Takaful and Karama programmes, raise pensions and public sector wages, and take measures to mitigate the impact of high prices. Moreover, there is a need to move forward with the implementation of a comprehensive economic plan to address the negative repercussions of global economic conditions, restore macro-financial stability, and consolidate the structural reform programme.
Hany Hafez – A banking expert
