Moody’s says Egypt’s capital market law amendments are ‘credit positive’

The latest amendments to Egypt’s Capital Market Law, recently approved by parliament, are credit positive for the country’s banks, said credit rating agency Moody’s in a statement on Monday.

The amended act will deepen the financial markets in Egypt by facilitating Sukuk issuance and investors’ ability to hedge, making the country a more appealing investment destination to foreign investors, Moody’s added.

“The law’s amendments include the introduction of futures trading, a commodities exchange, allow the establishment of privately owned stock exchanges, and reduce listing fees to 0.005 percent from 0.002 percent to encourage smaller companies to list on an exchange,” Moody’s said.

The amendments also facilitate issuance of Sukuks, set higher penalties for violations of the law and set up a federation for non-banking financial companies similar to the Federation of Egyptian Banks, statement read.  Egypt’s capital markets are underdeveloped relative to other African peers.

“Egypt ranks 14th among the 17 African countries in Barclays Africa Group 2017 Financial Market Index, which uses a variety of parameters, both qualitative and quantitative, to record the openness and attractiveness of countries across the continent to foreign investment,” Moody’s pointed out.

Government issuance dominates Egypt’s debt market and listed equities are few, it added. Listed corporate debt issuance accounted for 0.5 percent of listed bonds and the market cap of listed corporations accounted for 20 percent of 2017 GDP. Additionally, only 32 entities were listed on NILEX, a stock exchange dedicated to small and midsize enterprises (SMEs), as of October 2017.

“Although Egypt is the largest Arab country by population, the sukuk market is inactive, something the authorities are aiming to address with the revised law,”

Increasing the products offered and investors’ ability to hedge will increase Egypt’s attractiveness to foreign investors, which would provide additional funding options for banks, the rating agency elaborated.

Currently, Egyptian banks are financed mainly by deposits, which accounted for 71 percent of non-equity liabilities as of October 2017.

“The income banks earn from their debt capital markets activity will increase, diversifying their operating income, which is heavily reliant on interest income earned from investment in government bonds,”

As of October 2017, government bill and bond investments accounted for 31 percent of banking system assets and contributed more than 41 per cent to banks’ interest income.

To divert much needed credit to the SME sector, the central bank introduced regulations in 2016 requiring all Egyptian banks to allocate 20 percent of total loans to SME loans by 2020. Local SMEs, which account for around 80 percent of GDP and 75 percent of employment, cite a lack of access to credit as a main impediment to their growth.

“Despite the central bank’s initiative, loans to SMEs remain low at around 10 percent of total loans,” according to Moody’s estimates.