Egyptian government relies on local banks

14 March 2012

Egyptian banks nearing limits for government lending

Exposure to the Egyptian government within the domestic banking sector has been rising sharply over the past year as Cairo leans on the local financial sector to fund a budget deficit.

Between December 2010 and December 2011, bank claims on the Egyptian government rose by $15bn. “Banks have really been financing the government, which has growing funding needs,” says Marwan Barakat, head of research at Lebanon’s Bank Audi.

However, in the latest auction of treasury bills by the central bank on 11 March, yields fell and the size of the issue was increased, indicating that banks are still keen to buy up government debt.

The £E3.5bn ($580m) auction was increased to £E4.5bn and the bonds carried a yield of 15.841 per cent, compared with 15.91 per cent at the last auction on 28 February.

“During 2011, the price at which the banks would lend to the government was rising, but in the last month it has been starting to stabilise,” says Simon Kitchen, strategist at the local EFG Hermes. He says hopes that a deal will be agreed soon with the IMF and other international donors is boosting confidence. The country received a $1.2bn loan from the International Islamic Trade Finance Corporation, a division of the Saudi Arabia-based Islamic Development Bank (IDB) in early March.

Unless further foreign aid is arranged, the government could have to rely on even more local bank funding. The Finance Ministry said in early March that it expects the budget deficit for the year ending June 2012 to be £E150bn, higher than originally forecast.

Not all the banks have been as keen to buy government debt. “Many private sector banks have been trying to resist building up large claims on the government, but the public sector banks have concentrated on lending to the government,” adds Kitchen.

Local banks have had to step in to fill the gap when foreign investors largely withdrew from buying up local currency government debt after the ouster of president Hosni Mubarak in February last year.

There are signs though that appetite for private-sector lending could be on the rise. Dubai-based Majid al-Futtaim (MAF) has appointed two Egyptian banks, Banque Misr and National Bank of Egypt, to raise $500m for the development of its Mall of Egypt project.

Bankers from the privately owned lenders in Egypt say the concentration of public banks on buying government debt has enabled them to increase their market share in the corporate sector. However, the demand for credit is said to be mainly coming from companies looking for working capital rather than for capital expenditure. “The MAF loan is really an exception,” adds Kitchen.

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