Talk about Egypt's receiving a loan from the IMF began in April 2011, and it seems that it has remained just talk since then. However, as time passes the situation of the Egyptian economy has been worsening, and the need for the loan and other similar funding has become ever more pressing. Seeing the loan as a possible solution to the current crisis has become a common trend among government officials and economists, with experts comparing economic scenarios under which Egypt either receives the IMF loan or does not do so. Assessing the impact of the two scenarios on the country's banking sector through 2013 was the focus of a recent report prepared by Pharos Holding. According to the report, the outlook for the sector is dependent on the IMF loan. “In an environment of high government borrowing requirements and currency depreciation, the banks will continue to suffer from a liquidity squeeze until foreign currency inflows recover,” the report said. “We view the IMF loan as critical to foreign currency recovery, particularly for its signaling effect.” If received, the loan would help the Egyptian pound regain stability, the report said, with a revival in demand for local currency developing due to high interest rates compared to returns on deposits in other currencies. The resulting increase in local currency liquidity would make more credit available and would make it less expensive, encouraging the economy to start moving. On the other hand, pressures on the pound would remain high if the loan was kept on hold, and this would lead to a squeeze in local liquidity, increases in the cost of borrowing, and a crash in the equity market. The report highlighted watch factors that would increase the possibility of Egypt's receiving the loan, among them the successful introduction of the new taxes announced, and then withdrawn, in December and the upcoming parliamentary elections. Looking at the effect of the loan on local currency deposits, the report said these would likely grow by 10 per cent as the appeal of deposits in dollars would decrease in favour of deposits in the local currency. An absence of foreign funding would lead to a slower growth rate of 5.3 per cent in 2013, mainly on the back of higher dollarisation and exchange rate effects. The banks' lending activity is expected to stagnate on the back of a slowdown in economic activity in the absence of foreign funding. However, Pharos expected credit activity to start recovering in the third quarter of 2013 if the loan is received, and it expected the main use of the loan to be for funding capital expenditure, helping investment to recover. The report went on to say that non-performing bank loans would increase in 2013 if the IMF loan was not received. “On the back of further deterioration in economic conditions and moribund lending activity, banks with high exposures to the tourism, real estate and related industries will be the most impacted,” the report said. It said that as has recently been reported the National Bank of Egypt has allowed tourism-sector borrowers to suspend interest payments for three-month and six-month periods as of the beginning of 2013, which is similar to what happened in 2011. According to the report, most banks approached their maximum holding limit for government securities at the end of 2011, which was partly the reason for the Central Bank of Egypt's decision to cut the required reserves rate, being the amount of money the commercial banks were asked to keep as interest-free deposits with the Central Bank during the first half of 2012. As a result, the report expected liquidity pressures to re-emerge and yields to overshoot during 2013 in the event of Egypt's failing to secure the IMF loan or other sizable foreign currency inflows. Yields on one-year treasury bills increased after the 25 January Revolution to almost 16 per cent in early 2012, but started to ease down with the decline in the required reserve rate. As for market dynamics in general, the loan would give space for recovery, the report said, becoming more favourable as in 2010, and this change would increase fair value estimates for the top-tier banks by 50 to 60 per cent, including the Commercial International Bank and Credit Agricole.
