Egyptian subsidiaries of UAE banks will feel the heat of the 15.7% devaluation of the currency

Data from the Central Bank of Egypt (CBE) shows that the net foreign asset (NFA) position fell sharply from $13.7 billion to $5.1 billion in March, amid outflows from capital from non-residents triggered by the situation in Ukraine. Capital flight has raised fears of further currency volatility. In addition, capital outflows also amplify the effects on the domestic market of tighter global financing.

“With liquid foreign exchange reserves at $29 billion at the end of March, a similar drawdown of $13.7 billion would reduce the reserve stock to about $15 billion,” Moody’s said in a recent note. “This level would compromise external debt service coverage over the next 12 months, which we estimate at around $30 billion.”

London-based Capital Economics expects the Egyptian pound to fall another 25% by the end of 2024. percent of GDP,” he said.

Egypt’s banking sector was on the road to recovery from a year ago, supported by a strong economic recovery that improved the earnings and asset quality of UAE bank subsidiaries in Egypt.

Emirates NBD, First Abu Dhabi Bank (FAB), Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank and Mashreq have branches in Egypt. The profitability of the Egyptian operations has improved significantly over the past few years, reflecting the overall improvement in operating conditions. However, with increasing capital flight, currency volatility, inflationary pressures and rising interest rates, banks are expected to face a sharp decline in loan growth as non-performing loans are likely to decline. increase.

Inflation and interest rates are expected to soar further. Rising oil and food prices led to a surge in inflation. Overall, consumer prices rose 12% year-on-year in March.

“We expect price pressures to accelerate further following the depreciation of the exchange rate in March, bringing headline inflation to 10% in 2022 and 12% in 2023,” Fitch said in a statement. a rating. “In our view, the CBE should raise interest rates further to maintain positive real policy rates, control inflation and support the Egyptian pound and the attractiveness of local currency assets. 300 basis points by 2024.”

The Egyptian economy will benefit from respite from the current turmoil thanks to rapid international support and strong growth prospects for the economy. The GCC countries have collectively made $22 billion in commitments to Egypt, and Saudi Arabia has made a $5 billion foreign exchange deposit to directly bolster Egypt’s foreign exchange reserves, in addition an additional $10 billion for investment. The UAE has committed $2 billion in investments. Egypt is also in talks with the IMF on a new financing program.

“We expect this will help fund the broader current account deficit, which we estimate at 5.4% of GDP in fiscal year 2022, compared to 4.6% in fiscal year 2021,” Moody’s said. “Notwithstanding Egypt’s already large borrowings from the IMF of approximately $19 billion, we anticipate that the government will be able to access additional financing under the IMF’s exceptional access criteria. .

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