Egypt’s move to cut its benchmark interest rates for the third time this year is credit positive for lenders in the most populous Arab nation, Moody’s Investors Service said.
The central Bank of Egypt (CBE) cut the key rate by 100 basis points, lowering the discount rate to 13.75 per cent, seizing on slower inflation and a stable currency.
With inflation levels now below the CBE's targets, Moody’s said it expects 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.
“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,” Moody’s said in its latest report on Egypt. “Collectively, these developments will stimulate economic growth.”
Monetary stimulus couldn’t be more timely as business activity has contracted in all but two of the past 12 months, according to the Markit Egypt Purchasing Managers’ Index.
Moody’s now forecast Egypt's gross domestic product to grow 5.6 per cent this year and 5.8 the in 2020. Banks also are primed to benefit from increased credit growth, which the rating agency said will be more than 15 per cent in 2020. Pressure on asset quality of Egyptian banks will remain subdued. Banks' overall non-performing loans-to-gross-loans ratio was 4.1 per cent as of March 2019, it noted.
Following Egypt’s currency flotation in November 2016 that devalued it by half, interest rates rose by 700bps to 19.25 per cent by July 2017, while inflation accelerated to 33 per cent following reductions in the energy subsidy bill. The moved slowed domestic consumption and businesses postponed investment. However, Egypt has been trying to control inflation and bring the rates down, which have declined by 550 bps from 2017 peak.
The CBE said annual headline and core inflation continued to ease in August to 7.5 per cent and 4.9 per cent, respectively, their lowest levels in six years, and remains below the central bank's inflation target of 9 per cent, which indicates more cuts are on the horizon, Moody’s said.
