Tuesday 27, June 2017 by Matthew Amlôt

Moody’s: Egypt’s banks will benefit from country’s increased tourism

Moody’s has released its sector comment on Egypt’s tourism sector.

"Last Wednesday, Egypt’s Ministry of Tourism announced that tourist arrivals in the first three months of 2017 had jumped 51 per cent from a year earlier, marking the sector’s revival from its sharp contraction since 2011. Tourism in Egypt has great potential and has traditionally been a major economic force in Egypt, accounting for 19.5 per cent of GDP at its peak in 2007.

"The increase in tourism is positive for Egyptian banks because it enhances the repayment capacity of borrowers directly and indirectly linked to tourism. Additionally, the increase in foreign-currency flow from tourism will boost banks’ limited access to foreign currencies, improving their capacity to meet clients’ foreign-currency needs.

"Revenues from tourism increased nine per cent on a sequential quarterly basis to $826 million in the fourth quarter of 2016, from $758 in the third quarter and $510 million in the second quarter of 2016. According to the World Travel and Tourism Council, tourism directly accounted for 3.2 per cent of Egypt’s GDP and 2.9 per cent of employment in 2016. However, its total contribution including indirect effects on the economy was higher at 7.2 per cent of GDP. Indirect effects include the purchase of food and cleaning services for hotels, government spending related to advertising and promoting tourism and tourism spending outside the food and entertainment sectors. The tourism industry’s revival will positively affect the cash flows of borrowers in hospitality and related sectors such as transport, construction and food, and lead to job creation.

"Among Moody’s-rated banks, Commercial International Bank (B3 stable, b31) will benefit the most from an increase in tourism because it has the largest exposure to the sector, with around eight per cent of its total loans exposed to tourism, which is higher than the three per cent system average, according to our estimates. The bank’s ratio of nonperforming loans (NPL) to gross loans increased to 5.28 per cent as of September 2016 from 3.97 per cent in December 2015, reflecting the low economic growth following the sustained decline in tourism and the bank’s conservative approach of NPL classification. The March 2017 NPL ratio of 7.0 per cent was further exacerbated by the floatation of the Egyptian pound, which resulted in higher inflation and higher interest rates. The improvement in the tourism industry’s prospects and the bank’s relatively strict underwriting standards (e.g., lending to hotels with low leverage that can service their loans even with occupancy rates below 50 per cent) will help contain further asset quality deterioration.

"Increased foreign-currency revenues from tourism will improve Egyptian banks’ capacity to meet their clients’ foreign-currency needs and fuel economic expansion. Egypt has had a shortage in foreign currencies. The central bank’s decision to liberalise the exchange rate last November increased the availability of US dollars to Egyptian banks, however the shortage has not been fully addressed and a number of companies are still unable to fully cover their dollar needs.

"The increased availability of dollars from tourism will also allow banks to continue to gradually decrease their net foreign liability position (see exhibit). Dollar liquidity shortages pushed Egyptian banks to increase their foreign funding and repatriate foreign assets in order to meet clients’ needs. However, the gap declined to EGP56.7 billion in February 2017 from its peak of EGP116.2 billion in December 2016."

Features & Analyses