S&P Classifies Egypt’s BICRA at Group ’10’

Big 5

Standard & Poor’s Ratings Services Monday published its “Banking Industry Country Risk Assessment: Egypt.”

Standard & Poor’s (S&P) Ratings Services classified Egypt’s banking industry country risk assessment (BICRA) to group ’10’, making it part of a group of countries including Belarus, Greece, Jamaica, and Ukraine.

A BICRA is scored on a scale from ‘1’ to ’10’, ranging from what S&P view as the lowest-risk banking systems (group ‘1’) to the highest-risk (group ’10’).

S&P said that the main strengths of the banking industry were external financial support which provides leeway to address short-term challenges; resilient economy and banking system; and low private sector indebtedness and growing core customer deposit base.

However, weaknesses included: Very high exposure to low-rated domestic sovereign debt; Persistence of political tensions, low wealth, and large informal economy; Small bankable population and large number of banks; and Ongoing modernization and limited overall transparency.

“Economic risks in Egypt remain extremely high in a global context. Our assessment primarily reflects the banks’ key role in financing low-rated domestic government debt. Political and social tensions are likely to remain at elevated levels over the medium term, putting strain on already weak economic growth prospects.” it said

S&P projected that the real GDP per capita growth will gradually recover to around 3.5 % in 2015 compared with a low point of 1.8 % in 2011 when the popular uprising began, and an average of 6% between 2007 and 2010.

S&P considered Egypt’s economic risk trend as stable, at the highest risk level. moreover, political tensions will constrain economic growth and maintain elevated credit risk for banks during the next 18 to 24 months.

The rating agency based its industry risk score for Egypt on its assessment of the institutional framework, competitive dynamics, and system wide funding.

“The key factors are the gradual convergence towards international standards, dominance of government-owned banks and tail risk relating to retail depositors confidence in banks. Despite recent improvements and a clear commitment from the authorities to reform the banking sector, this is still a work in progress,” It said.

S&P added that its highly expected that political uncertainties and the economic slowdown will delay the full implementation of the initial reform program, from the privatization of some state-owned banks to improved transparency. S&P did not exclude the possibility that regulations might be relaxed.

“We view the “industry risk” trend in Egypt as negative. Retail customer deposits are the main source of funding for banks. We believe that additional pressures on already weak sovereign creditworthiness could expose banks to a shift in business confidence, and consequently to elevated refinancing risks,” it said.