Egyptian banks' foreign currency liquidity is still vulnerable to fluctuations in investor appetite for emerging market debt and shortages of foreign currency receipts amid the coronavirus, according to Fitch Ratings. In a new report, Fitch said the recent financing that Egypt has obtained from the International Monetary Fund (IMF) and from its Eurobond issuance have helped to ease pressure on foreign currency liquidity in the short term. "Yet, we believe that the strain is more severe than during the second half of 2018 regarding emerging markets sell-off and likely to be longer lasting. A sustainable improvement in foreign currency liquidity would require the return of foreign currency receipts, which are contingent on external economic factors," read the Fitch report. Egypt tapped the capital markets in May, raising $5 billion in Eurobonds, and has secured two new IMF loans. The actions may have helped foreign currency reserves to increase slightly to reach $38.2 billion at end of June, up from $36 billion at end of May, after they had fallen by $9.5 billion in March-May due to $17 billion capital outflows triggered by volatility in global financial markets amid the COVID-19 crisis. Fitch also said that Egyptian banks' foreign currency liquidity is sensitive to external shocks, exchange-rate risks and investors' appetite for emerging market debt, adding that yields on 90-day T-bills remain high at about 13 percent, despite the 3 percent interest rate cut CBE introduced in March, helping to attract foreign investors. Appetite for high-yielding emerging market debt is starting to pick up and foreign currency outflows had started to reverse by end of June, according to Fitch. But the report warns that renewed outflows could be triggered if a sharp depreciation of the Egyptian pound occurs. In this regard, the report said that foreign holdings of Egyptian T-bills were $7.5 billion at end of April, constituting about 20 percent of foreign currency reserves, which reflects the vulnerability of foreign currency liquidity. The build-up of Egypt's net foreign assets (NFA) and foreign currency liquidity will remain constrained by lower receipts from Egypt's main foreign currency resources, including tourism (4 percent of GDP), Suez Canal revenue and net foreign direct investments (FDIs), according to the report. Moreover, weaker international demand will curb merchandise exports and earnings from the Suez Canal, which were $17.0 billion and $5.8 billion, respectively, in 2019 (together, about 10 percent of GDP), according to the report. Fitch also expected remittances from Egyptian expatriates, worth $25 billion in 2019 and largely from expats in Gulf Cooperation Council countries, to shrink, projecting Egypt's current account deficit to grow to 5.3 percent of GDP in 2020, up from 3 percent in 2019, intensifying pressure on foreign currency reserves. The report demonstrated that Egypt's foreign currency deposits represent less than 20 percent of banking sector deposits and are largely stable, as they are predominantly retail. The foreign currency loans-to-deposits ratio was an adequate 68 percent at the end of the first quarter of 2020, but coverage of foreign currency deposits by NFA collapsed when NFA went negative and was still close to zero at the end of May 2020, according to the report. Fitch said that it had rated Egyptian banks at b+ based on Rating Watch Negative (RWN) in April and it will resolve the RWN once it has assessed the extent of the deterioration in the operating environment and foreign currency pressures on each bank's credit profile.
