Political turmoil and economic uncertainty since the ouster of President Mohamed Morsi have lead to a wave of credit rating downgrades and low bank ratings.
The poor performance of the economy, which is experiencing its slowest growth rates in decades, had led several international agencies such as Capital Intelligence (CI), Moody’s and Fitch Group to downgrade ratings of Egyptian banks and maintain a “negative outlook”.
On 20 August CI lowered the Commercial International Bank (CIB)’s long-term foreign currency rating (FCR), which is the bank’s ability to meet the foreign currency denominated financial obligations, to B-, and affirmed the short-term FCR at B following the recent downgrade of Egypt’s sovereign long-term FCR, the risk of investment in Egypt, to B- from B.
“The ratings, which are set at the same level as CI’s sovereign ratings for Egypt, denote significant credit risk, as CIB’s capacity for timely fulfillment of financial obligations is very vulnerable to adverse changes in the operating environment and economy,” the agency’s statement read.
“When sovereign ratings depreciate, the banking sector automatically follows,” said Mostafa Bassiouny, economist at Signet Institute.
In July, Fitch Egypt’s Issuer Default ratings (IDR), the measure of credit risk for financial and non-financial corporations in a country, was downgraded from B to B- citing “heightened uncertainty” and “inflamed political tensions” as the reasons. A month later, the international agency lowered the FCR for Banque du Caire, Export development bank of Egypt, Arab International Bank , Arab African Bank and the National Bank of Egypt following Egypt sovereign ratings action.
Ashraf Salman, CEO of Cairo Financial Holding, said the negative outlook of a country reflects the microeconomic units operating within it. “It’s a chain effect. When the country’s outlook is negative, the microeconomic units will not be able to maintain their obligations.”
Salman said credit rating agencies focus on the theoretical aspect and “neglect the practical situation” in the country.
“The United States and Eastern Europe’s loan to deposit ratio is 90%, in Western Europe it’s 80% and in some gulf countries it can exceed 100%, however this ratio in Egypt is around 50%; a very low ratio compared to other countries,” he said.
“The banking sector is very well provisioned so even if the provisions increase and the profits decrease [leading to the return on investments and equity], this will be a marginal effect,” he said.
Salman said Egyptian banks invested in government bonds, which meant their financial situation was secure; “Egyptian banks’ investments are divided into 85% in treasury bills and 15% treasury bonds….that the government would not be able to pay off these T-bills is unrealistic,” he said.
Moody’s latest report, on 19 August, stated that the market-based risk has deteriorated amid the violent dispersal of sit-ins, adding that investors are “understandably concerned” about the impact of the civil unrest on the already fragile economy.