The devaluation of the Egyptian pound, which occurred at a time of low foreign reserves, is credit positive for the Egyptian banking system, Moody’s Investors Service stated in a report issued on 27 April.
“Bringing the official exchange rate closer to unofficial market rates will make the country’s assets more attractive for foreign investors and will improve trade competitiveness,” Moody’s said in the report.
The Central Bank of Egypt’s (CBE) 14.4% devaluation of the Egyptian pound last March is credit-positive to Egypt as it narrows the gap between the official exchange rate and market rates, the report read.
Moody’s economic growth expectation for Egypt is 3.5%, lower than the government’s expectation of 4% to 4.25%. The report explained this is mainly affected by “the decline in tourism, lower investment, and weakened industrial activity caused by the shortage of dollars which makes it difficult to import raw materials”.
Moody’s explained that increasing foreign investment will ease the pressure on the banks for dollars which is caused by a high demand for foreign currency.
The CBE move will curb spending of foreign exchange reserves to support the value of the Egyptian pound, Moody’s said, adding that it will boost exports and investment flows.
“The weakening currency will exert a mild pressure on the banks’ already low capital buffers, this is because US dollar-denominated banking assets will appreciate relative to the banks’ EGP-denominated capital, lowering the capital ratio,” the report read.