According to the CBE, the banking sector’s financial stability in recent years has allowed it to be able to deal with crises and repercussions
Egypt’s financial system stability, and improvements to the country’s economic performance, helped protect the domestic economy against internal and external disturbances, according to the Central Bank of Egypt’s (CBE) latest financial stability report.
The report also noted that the financial system saw more stability and better economic performance in recent years, due to the government’s successful economic reform program that began in 2016.
In 2020, the system’s stability played an important role in dealing with the repercussions of the coronavirus pandemic, helping reduce the possibility of systemic risks that would have affected it.
CBE’s report noted that the lack of these risks related to fluctuations in foreign capital have strengthened financial stability without the need for macro-precautionary policy.
It further explained that the economy and banking sector have the ability to absorb the consequences of the COVID-19 pandemic on foreign currency resources. This added to the reduction of pressure on the exchange rate, while also keeping market risks low for the banking sector.
The banking sector’s implementation of a range of financial solvency and high liquidity rates allowed continued positive performance in financial intermediation without the CBE stepping in.
The sector has also continued to successfully perform its role in financial intermediation, while promoting financial inclusion and supporting economic growth.
Once it was clear COVID was here to stay, they also provided necessary backing to import basic and strategic commodities to cover the market’s needs.
According to the CBE, the banking sector’s financial stability in recent years has allowed it to be able to deal with crises and repercussions, particularly the sector’s development of risk management strategies. The banking sector’s liquidity ratios have also continued at a level higher than the prescribed regulatory limits, as banks enjoy sufficient liquid assets.
It said that the banking sector accounted for about 89.6 percent of the Egyptian financial system’s total assets at the end of fiscal year (FY) 2018/19. It has seen an improvement of some of the top items of its financial positions, with good financial indicators until June 2020, despite COVID-19 repercussions.
The CBE indicated that the banking sector provided about EGP 68.8bn as part of the private sector initiative for industrial, agricultural and contracting at the end of June 2020.2018/19, with a growth rate of 5.8 percent, and continued to increase to EGP 6.4trn in June 2020.
The Financial Stability Index saw great improvement in 2019, but declined due to the pandemic’s effects on global economies and financial systems, says the CBE report. The decline was particularly shown on the global economic climate index and the financial markets index.
On a positive note, Egypt’s financial system and non-banking financial sector companies have shown, through the application of stress tests, to be able to absorb potential losses from certain scenarios and financial risks due to the second coronavirus wave.
The application of the tests were to estimate potential losses by the risks posed by the pandemic, and the extent of how the solvency and capital base of companies and institutions would be affected by the risks from precautionary measures to prevent the virus’ spread.
The capital adequacy rate remained at a level higher than the minimum, in accordance with Basel instructions of 10.5 percent, and the minimum of 12.5 percent set by the CBE.
It stressed that the continued improvement of government financial performance reduces the possibility of the banking sector being exposed to risks of a public financial turmoil. It also contributes to improving financial space indicators, which have enabled the government to take incentive measures to contain the repercussions of COVID-19.
The non-performing loan ratio decreased to 3.9 percent of total loans in June 2020, after remaining almost stable in FY 2018/19 and the previous fiscal year at about 4.1 percent. Banks continued to maintain a high percentage to cover allocations for non-performing loans, which amounted to 97.6 percent in FY 2018/19, and 97.2 percent in June 2020.
The capital adequacy ratio increased to 20.1 percent in June 2020, compared to 17.7 percent in FY 2018/19, and 15.7 percent in FY 2017/18.
According to the CBE, net foreign assets in banks rose to EGP 77.2bn in December 2019, compared to negative EGP 114.5bn in December 2018, as a result of increased foreign exchange inflows in 2019.
This has contributed to a rise in net international reserves to $45.5bn in December 2019 and an absence of pressure on the local currency. Due to the repercussions of COVID-19, however, net foreign assets decreased again to record negative EGP 61.2bn in March and negative EGP 27.1bn in June 2020.
This appeared in conjunction with the decline in net international reserves to record $40.1bn in March and $38.2bn in June. This came as part of measures to contain the pandemic’s consequences, and has contributed to the exchange rate’s stability and the reduction of market risks in the banking sector.