The banking sector’s FX liquidity has recovered from coronavirus pandemic-induced lows, thanks to the return of foreign inflows to capital markets, Fitch Ratings said in a report on Tuesday.
Net foreign assets at banks increased to $ 2.9 billion in October, continuing to rebound after having turned positive in September.
Excluding the central bank, net foreign assets in banks are still low compared to $7.3 billion in February, before the pandemic struck.
Meanwhile, the combined net foreign assets of commercial banks and the CBE in September rose 33 percent m-o-m to positive $14 billion, up from $10.6 billion in August, central bank data we picked up in November showed.
The liquidity position is a “sustained improvement” as net foreign assets had dropped to negative $5.3 billion in April, when banks had to service some $17 billion of capital outflows triggered by the global market panic, Fitch said. The rating agency had previously expected the recovery in FX to last longer.
This improvement was underpinned by foreign investors flocking back to EGP treasuries, Fitch said. Foreign portfolio investments recovered sharply since May, increasing to $23 billion by the end of November, up from $21.1 billion six weeks earlier and more than doubling from $10.4 billion in May.
Egypt’s carry trade continues to be attractive for overseas investors, the ratings agency noted as real interest rates continue to be among the highest in the world, despite this year’s 400 bps reduction in nominal rates.
Banks, however, saw a 21 percent increase in foreign liabilities in the first ten months of 2020, posing some long-term repayment risks. Net foreign assets at banks also only covered 7 percent of local foreign currency-denominated deposits at the end of October, down from 18 percent at the end of February, Fitch said.
However, nearly 70 percent of the banks’ external debt is long-term, limiting short-term refinancing threats, it added.
FX liquidity is still vulnerable to any drop in investor confidence and to exchange-rate fluctuations, and the reliance of banks on foreign creditors carries “refinancing risks,” Fitch added. Given higher external financing needs and the drop in FX receipts — as we’ve seen in the plunge in tourism revenues — Fitch forecasts “renewed pressure” on FX reserves and on the EGP.
