Total deposits in the Egyptian banking sector jumped to their highest levels in seven years in May, according to the monthly bulletin published by the Central Bank of Egypt (CBE). The monthly report, issued last week, said that deposits increased by LE10 billion during May to reach LE1.169 trillion pounds in May, compared to LE1.159 trillion in April. The hike could be attributed to the fact that political instability and the security vacuum had made businessmen and investors more cautious with their money, preferring to keep it in the banks than spend it, according to Madgi Abdel-Fattah, a banking expert with 34 years experience in the sector. The current high interest rates of up to 12.5 per cent on some saving certificates had also bolstered this trend, according to Abdel-Fattah. “Most businessmen and investors have put their projects and expansion plans on hold as they wait to see whether conditions in the country will improve,” he added. Keeping money in the banks is certainly the safest option, as under Law 88/2003 the CBE guarantees deposits within the Egyptian banking sector. The stability in the Forex market, with the Egyptian pound gaining some ground against the dollar, has also limited depositors' tendencies to keep their deposits in the US currency and thus boosted local currency deposits. “People have backed away from changing their savings into dollars,” Abdel-Fattah commented. “Exchanging pounds for dollars under these circumstances is not as profitable as it seemed a few months earlier, especially with the increased interest rates on the pound.” In March, the CBE increased interest rates to curb inflation and to prevent further downward pressure on the pound. However it cut rates earlier this month, putting rates on deposits at 9.5 per cent and on loans at 10.5 per cent in a move designed to trigger growth in the ailing economy. The economic growth rate has decreased to almost 2 per cent, far less than the percentage needed to create job opportunities for the almost 600,000 people now entering the job market every year. “Investing in the stock market has become risky, with the fluctuation in the index reflecting the political flux. This has pushed some people away from investing in the bourse, preferring to place their life savings in the banks instead,” Abdel-Fattah added. Ahmed Adam, a financial expert, referred the increases in deposits to the promotions by the banks of the advantages of deposit accounts and saving certificates over the past few months, at interest rates ranging from between 12.5 and 13 per cent. These rates are intended to ensure that there is enough liquidity to invest in government bills and bonds. However, the increases in the values of the bank deposits is “not an indication of economic recovery”, Abdel-Fattah said. Instead, they point to the fact that the banks are reluctant to use these deposits to finance businesses, companies and factories in the light of the current political instability, he added. Many sectors have come to a halt as a result of banks cutting funds, such as construction, real estate and the industrial sector in general. Banks currently don't approve loans in the absence of a complete report on the credit-worthiness of their clients and various repayment guarantees. With declines in revenues and increases in public spending, salaries and wages, plus the need to finance the imports of basic commodities, the state has come to depend on issuing treasury bills and bonds to finance the public deficit. In turn, local banks have increasingly invested in public debt instruments, in an amount that has surged from LE266 billion at the end of 2010 to LE575 billion in 2012. The increase in the banks' financing of treasury bills has also affected the employment indicators and augmented the government's share of domestic credit at the expense of the private sector's share of the banking sector's financial reserves. Among the rewards of this is that treasury bills and bonds are less risky, are exempted from taxes, yield higher profits and are generally seen as a safer hedging instrument than other forms of investment. However, there are also shortcomings, such as the effect on a bank's credit rating due to a concentration of risk in just one instrument, as well as the effect of pushing interest rates and the cost of credit upwards. This could lead to inflation and a heavier debt burden on the government, Adam explained, adding that the banking sector had invested some LE636.2 billion in public debt instruments as of May 2013. “The assumption is that the banks' investing in public debt instruments is less risky, but this is not completely true. The government hasn't been paying its debts to the banks in a long time, and instead it has been paying its debts partly by issuing new treasury securities.” The banks have reached their limit in investing in public debt instruments, Adam said, meaning that it will be difficult for them to continue this process without taking greater risks. As for the external deposits in the banks abroad, Adam said that this only represented a small increase and had taken place mainly because of differences in currency valuations, especially with the increase in the price of the dollar and the euro against the pound in May. “The Egyptian pound registered its biggest decline in the face of foreign currencies during the month of May, before it started to recover again in June,” Adam said. The price of the dollar recorded a more than 16 per cent boost against the pound during the period between 30 June 2012, and 30 June 2013, while the euro rose by 21.5 per cent and sterling by 13.5 per cent. Abdel-Fattah now expects a decline in bank deposits, especially as the government announced a new package earlier his week to stimulate the economy by LE22.3 billion through the implementation of projects designed to encourage spending.
