Egypt’s embattled banking sector appears to be recovering due to an improving macro-economic environment, according to Moody’s Investors Services. As a result of recent studies, Moody’s has upgraded Egypt’s outlook from negative to stable as a result of improved confidence in the banks’ funding and liquidity positions.

“The change reflects improvement in the operating environment for banks in Egypt, driven mainly by the country’s improving macroeconomic performance and the new government’s ongoing commitment to fiscal and economic reform. We expect real GDP growth to accelerate over our outlook horizon, which will not only create business opportunities for the banks but also support improvements in their loan quality while allowing them to maintain strong funding and liquidity positions,” said Melina Skouridou, Moody’s lead analyst for Egyptian banks. According to the report, Moody’s expects 5 per cent GDP growth in Egypt for the fiscal year ending June 2016, up from an expected 4.5 per cent in 2015 and 2.2 per cent in 2014.

However, one point of possible concern is that the fact that Egyptian banks remain highly exposed to government securities, which account for 43 per cent of the banks’ assets and approximately seven times their equity, as a result, lenders are tightly linked to the government’s credit rating. Moody’s decision to upgrade the banks’ rating is tightly linked to the country’s GDP growth which is forecast to continue thanks to infrastructural projects and increased foreign investment and tourism. The $6.5 billion package of aid from the GCC was highlighted as a particularly important inflow. Moody’s noted that the strengthening of the domestic economy and improvements in the performance of restructured loans also contributed to an improvement in asset quality. However, capital buffers will continue to be pressured, in Moody’s view, owing to the banks’ large holdings of local-currency government bonds which are zero risk-weighted in the calculation of capital buffers under the domestic regulatory framework.

Although risks associated with political stability and security remain high, the ratings agency said its expectations for the country’s performance are in sharp contrast with last year’s forecast. The IMF’s latest World Economic Outlook highlighted the need for ongoing support in terms of reforms and external financing in order to continue the recovery.