Moody’s Investors Service on Monday said the Egyptian central bank’s decision to cut key interest rates is a credit positive for banks.
The Central Bank of Egypt decided at its Sept. 26 meeting to lower its key interest rates for the second month in a row, after inflation fell further and as central banks globally ease monetary policy. The overnight deposit and lending rates were cut by 100 basis points to 13.25 percent and 14.25 percent respectively.
“…, we expect additional rate cuts over the next year, which will bolster business confidence and economic growth, supporting increased credit growth and business opportunities for banks, which will outweigh pressure on their net interest margins.” the Moody’s report said.
Lower interest rates and inflation will encourage capital spending by businesses that have been holding back on such investments, supporting consumer spending through enhanced debt affordability and government finances through a reduced interest bill, the report added.
Collectively, these developments will stimulate economic growth, Moody’s said, forecasting Egypt’s GDP would grow 5.6 percent in 2019 and 5.8 percent in 2020.
“Banks will also benefit from increased credit growth, which we forecast will be more than 15 percent in 2020, while pressure on asset quality will remain subdued; banks’ nonperforming loans-to-gross-loans ratio was 4.1 percent as of March 2019.”
Following Egypt’s currency flotation in November 2016, interest rates rose by 700 basis points to 19.25 percent by July 2017, while inflation accelerated to 33 percent in the aftermath of reductions in the energy subsidy bill, which led to higher energy prices. As a result, consumption fell and businesses postponed investment. The subsequent cuts of 50 basis points in interest rates since their July 2017 peak and decline in inflation are reversing that situation, Moody’s said.
The CBE said annual headline and core inflation continued to ease in August to 7.5 percent and 4.9 percent, respectively, their lowest levels in six years, and below the central bank’s inflation target of 9 percent plus or minus three percentage points. “That suggests further rate cuts are likely.”
However, Moody’s referred to a negative side effect of the rate cuts that will be pressure on banks’ net interest margins.
“We expect banks’ loan and investment books to fully incorporate the drop in interest rates, while a portion of deposits – mainly demand deposits – are non-interest bearing or already earn very low rates.”
Moody’s said it believes, however, that the benefits of increased business generation would outweigh pressure on net interest income stemming from lower margins.
The state-owned banks in particular National Bank of Egypt and Banque Misr also have more scope than private-sector banks to contain the drop in net interest margins, it added. This is due to the fact that “their more expensive funding products – certificates of deposit, saving deposits – gradually mature and new deposit products are priced lower.”
