Egypt’s banking system continues to struggle in an increasingly unsettled political environment following the recent resignation of the cabinet headed by Prime Minister Hazem el-Beblawi on 24 February.

UK-based rating agency Moody’s says the outlook for Egyptian banks remains negative, an outlook that has not changed since 2011 when President Hosni Mubarak was ousted from power.

The banks continue to be hampered by high and increasing exposure to government debt, and Moody’s says the banks have insufficient capital buffers to absorb potential losses.

As of September 2013, banks’ exposure to government securities reached 5.7 times their shareholders’ equity, and Moody’s forecasts this to grow over the next 12 to 18 months.

The government is highly reliant on local bank funding due to the absence of foreign funding.

The high exposure to sovereign paper means the credit profile of Egypt’s banks is closely linked to the credit profile of the Egyptian sovereign.

Moody’s does expect that the banks will remain well-funded due to strong deposit bases, which are heavily supported by remittances from Egyptians working abroad.

Before the cabinet resignation, there were some signs of an improvement in the economic environment. In January, the Central Bank of Egypt said its international reserves remained stable at $17.1bn.

This is a marginal increase on the $17.05bn recorded in December and marks the first rise in reserves since last August.