Investors have fallen out of love with Egypt, whose economy has been hit by low levels of global growth, as well as by home-grown problems, such as high fiscal deficits and administrative drag. Some banks entered 2004 promising better things, especially after the Central Bank of Egypt (CBE) announced a change of accounting procedures to allow banks to revalue investments available for sale in line with foreign exchange moves; this revised a practice that had exposed some banks to accounting losses if the Egyptian pound weakened.
The pound’s value has been a hot topic in the past year. According to Moody’s Investors Service analyst Mardig Haladjian, new provisioning requirements and losses related to the devaluation – the pound lost more than one-quarter of its value since being floated in January 2003 – have hurt Egyptian banks’ performance and created bleak prospects.
Some banks are reporting an upturn after an undoubtedly tough year. Traders said that investors on the Cairo and Alexandria Stock Exchange (CASE) rallied to Commercial International Bank in mid-January, in expectation of a good set of full-year results and “the positive benefits of CBE’s new accountancy rule”. Misr International Bank has also benefited from the more positive mood.
But the overall perception is that the banking sector remains hamstrung by higher provisioning, the continuing impact of devaluation and non-performing loans (NPLs) – and the heavy hand of the state. “One thing we lack is a firm foundation provided by government,” says one Cairo banker. Adding to concerns about the future are President Hosni Mubarak’s apparently ailing health and a looming succession struggle.
On the plus side, the CBE is attempting to harmonise the banking sector with most of the Basel II principles and the government is promising to relaunch the privatisation programme. Stakes are being offered in companies that include Abu Keir Fertilisers, Egyptian Financial and Industrial Company, and Paint and Chemical Industries.
Non-performance risks
But Moody’s Mr Haladjian and Standard & Poor’s analyst Ala’a Al-Yousuf still agree that the banking sector represents a risk. NPLs reached 20% of total loans by the middle of 2003. And gross problematic assets in the banking sector could be as high as 75% of domestic credit to the private sector and non-financial public enterprises, which is the equivalent of more than half of GDP.
Those woes have infected the broader economy: banks that are hampered by high provisioning are more reluctant to extend credit, especially to public sector companies. Total credit growth was only 10.2% in 2002 and 6.6% in the first eight months of 2003. Retail lending continues to grow but even that sector could become risky in an economy whose per capita GDP is less than $1200.
Some smaller banks may not survive the rough times, according to Moody’s. Four state-owned banks – National Bank of Egypt (NBE), Banque Misr, Banque du Caire and Bank of Alexandria – account for about 50% of total bank assets and boast branch networks that allow them to continue to reap the bulk of retail deposits. But analysts say the banking sector is held back by public sector institutions’ lack of sophistication and concerns about asset quality.
Even so, Moody’s expects private banks’ return on assets to grow by 1%-2%. Privatisation could provide a kick-start, especially if it brings in foreign investors and expertise.
Further complicating the banking scene is the delay in implementation of recently enacted reform initiatives, such as a mortgage law and the institution of a primary dealer system, which should open up new areas of business and invigorate domestic capital markets. Other major reforms, such as a securitisation law, the elimination of some subsidies and the reduction of the massive public sector, are also on hold. “This is hardly unexpected given the slow pace at which our administration usually goes,” says the Cairo banker.
Wider recovery needed
Some sectors are attempting to take advantage of the new floating currency regime. As an industry that benefits from the devalued pound, tourism has been overburdened with hopes, even if it is subject to geopolitical turbulence. Tourism prospects were damaged by the crash of a Flash Airlines charter flight in the waters of the Sharm El-Sheikh resort in early January (although not as much as they might have been had the crash been due to terrorism).
In 2003, Egypt enjoyed a record year for tourism, with more than six million visitors for the first time. Tourism revenues reached $3.4bn in the first six months, according to minister of tourism Mamdouh El-Beltagui. That made tourism the main source of hard currency and it accounts for at least 10% of GDP.
Hopes have also run high that exports might compensate for slow growth. But, according to minister of foreign trade Youssef Boutros-Ghali – who has long been a torch-bearer for globalisation and accelerated liberalisation in Egypt’s highly bureaucratic administration – although exports have risen on the falling pound, it will take some time before the effect is felt in the broader economy because of the low volumes involved.
Devaluation lent an air of uncertainty to the export sector because of concerns about future valuations of the pound. Analysts say that while Egypt has refrained from intervening in forex markets, there is evidence that the government has put pressure on local banks to keep the exchange rate stable. Bankers have been calling the pound’s liberalisation a “managed float”. The government has said the pound is going through a “transition” period that will eventually result in a liberalised exchange rate.
The appointment in December of NBE chairman Farouk El-Okdah to head the CBE could make a difference. He was quick to dampen speculation, saying: “Monetary policy is fixed and will not change for the interests of the country.” But the CBE will move to an inflation-targeting regime and this should underpin the exchange rate float, according to Mr Al-Yousuf.
Foreign exchange reserves could benefit from continuing investment into Egypt’s energy sector, slow import growth and the tighter monetary policy needed to support the devaluation, according to Standard & Poor’s. But monetary policy slipped somewhat in mid-2003, sending T-bill rates back down and adding to uncertainty. The CBE now plans further moves to draw investors into Egyptian pound instruments, rather than dollars.
Looming debt burden
Egypt emerged as one of the big winners from the 1991 Gulf war. The then US president, George HW Bush, pressed for a “new world order” and huge debts were cancelled. As the Arab world comes to terms with the effects of the current US president, George W Bush’s 2003 Iraq war, Egypt’s role is marginal and no major peace dividends are expected. Rather, external debt remains a looming problem, perhaps even one that requires immediate attention.
Even at the equivalent of 125% of current account receipts, gross public external debt is well structured for the near term, and debt service requirements are only 9.1% of current account receipts. But big central government deficits, which could go as high as 7% of GDP or more as a result of devaluation, are adding to the problem.
Privatisation might help matters but there has been little movement, reflecting the slow pace of change from a cumbersome administration. In January, the Ministry of Public Enterprise announced another round of privatisations, offering the state’s stakes in more than 30 companies, most of which are already partially listed on CASE.
Leadership questions
One major intangible issue is the question of a successor to Mr Mubarak, who is now 75. With his health in question since his near-collapse during a speech to parliament last November, the issue of succession has been increasingly on Egyptians’ lips.
Mr Mubarak felt pressured to give a public denial of any plans to put his son, Gamal, into the presidency. Such a presidency might please bankers – Gamal Mubarak worked at JP Morgan in London before establishing his own boutique operation prior to returning to Egypt, where he is now number two in the National Democratic Party.
But, in line with Egypt’s “republican” tradition, which the president recently reiterated to force attention away from the Gamal issue, most analysts expect the next president will come from the ranks of the military, like Mr Mubarak’s predecessors.
Mr Mubarak has not appointed a deputy since succeeding Anwar Sadat as president in 1981. Investors are already wary of the climate of uncertainty in the country and an early move by Mr Mubarak to circumvent Egypt’s imperfect democracy – such as appointing a successor now – could discourage them further.
“Politics here is a bit of a vacuum,” said the Cairo banker. “And it’s not just nature that abhors that situation.”
