Global research consultancy firm, IHS, will downgrade Egypt’s banking sector to “significant risk”, citing banks’ large holdings of sovereign debt, which comprise an estimated 40% the country’s GDP.
The global firm stated in a press release issued earlier this week that despite the moderate amount of credit supplied by Egyptian banks to the economy, which averaged 6% per year between 2010 and 2012, the country’s political turmoil still “raises credit risk factors significantly.”
“Ongoing political uncertainty in Egypt, with its negative impact on government finances and the country’s external balance of trade, will continue to influence banking-sector risks in the near term,” the release said.
The report explained that such events could negatively impact the ability of all borrowers to cover the repayment of interest and principal on a debt, and deteriorate the financial position of the government.
“Given the ongoing political uncertainty in the country, banks could find that their government securities are not liquid in the event of future distress, effectively raising what would otherwise be a low liquidity risk profile,” it explained.
Egyptian banks currently hold around 40% of their assets as government-backed securities and the sector remains dominated by state-owned banks.
The report added that as Egypt’s political transitional period continues the banking sector could experience distress, due to banks holding substantial holdings of sovereign debt and lending to vulnerable economic sectors.
“Pressure on government finances is elevated and the sector thus remains heavily exposed to a potential default on sovereign debt,” it said.
The banking sector lends up to 20% of sizeable financial amounts to governmental institutions, and up to 25% to the service sector: “areas that will continue to be affected by deflated foreign exchange earnings and economic growth in the near term.”
IHS expects the country’s economic growth to remain low over the next 12 months.
“Ongoing political uncertainty in Egypt, and its impact on government finances and the country’s external balances, will continue to influence banking-sector risks in the near term,” the report concluded.