Egypt’s robust banking sector has survived the economically turbulent period that followed the 2011 revolution remarkably well. High-quality asset bases and generous capital buffers have enabled financial institutions to support the nation during this challenging period, most notably through the purchase of large volumes of Treasury bills (T-bills), which assisted the government in meeting its fiscal obligations.
A Balanced Approach
However, while banks have benefitted from the high yields that T-bills have offered them, there are concerns over the impact this is having on the extension of credit to the private sector. As a result, in many cases, banks are attempting to limit the amount of Treasury issuances on their books. “T-bills with tenors of a year are problematic in that there is no long-term stability. We are trying to take a more balanced approach. Our first priority, therefore, is lending, and only surplus capacity from our deposit growth goes to sovereign debt,” Sameh Badry, chief financial officer at QNB Al Ahli, told OBG.
A lack of lending opportunities has made achieving a balanced loan portfolio a challenge. Accordingly, lenders have attempted to extend beyond their traditional horizons and break into new market segments, such as small and medium-sized enterprises (see analysis). However, a stabilising macroeconomic scenario has raised hopes that the nation’s banking sector will be able to resume the lending activity which has historically driven its asset growth: big-ticket corporate lending to the large projects crucial for developing the national economy.
The Egyptian Economic Development Conference (EEDC), held in March 2015, highlighted the potential for project finance by Egyptian banks. Amongst the signature deals announced at the event was a $12bn commitment by BP to the natural gas fields it operates in the West Nile Delta; a $4.6bn undertaking by Siemens to develop electricity-generating infrastructure and a green energy manufacturing facility; two $4.5bn, coal-fired power projects from Al Nowais Investments and Benchmark; a $4bn real estate development project in the Suez region from Saudi Arabia’s Abdul Rahman Sharbatly and Fahd Al Shobokshi; and multimillion-dollar projects from General Electric and Dubai Ports International. According to the prime minister’s closing statement, the event generated $72.5bn in investments, facilities and loans, including $36.2bn in signed investment contracts, $18.6bn in vendor-financed infrastructure contracts (mostly in the energy sector) and $5.2bn worth of loans from international banks.
The day prior to the conference saw the promulgation of the long-anticipated investment law, a significant development which introduced substantial changes to the Investment Law of 1997, as well as amendments to the provisions of the Companies Law of 1981, the Sales Tax Law of 1991 and the Income Tax Law of 2005. The broad ambition of the law is to attract new investments by removing legislative obstacles, streamlining bureaucratic procedures, and offering incentives and guarantees.
To this end, sales tax and Customs duties have been trimmed, senior executives given protection from prosecution for actions taken without their knowledge, the bids and tendering process streamlined, exit procedures made more straightforward, the process by which state land is allocated clarified, and greater provision made for the resolution of disputes between the investor and the state (see Economy chapter). The law also authorises the General Authority for Investment to act as a one-stop shop for investors in designated sectors to obtain the licences and approvals necessary to run their businesses.
The positive developments taking place in the domestic economy with regard to project finance openings are further strengthened by international trends. In the run up to the global economic crisis, European institutions were financing the rapidly developing infrastructure of the MENA region, such as new roads, airports, railways and health care facilities. The global economic crash in 2008 and the subsequent eurozone debt crisis, however, compelled many European banks to withdraw from non-core activities such as Middle East project finance, a trend that was granted further momentum by the introduction of Basel III and its stricter capital requirements.
Initially, Asian lenders were seen as the key beneficiaries of this development and the altered paradigm was notably apparent in the 2012 financing of the Gulf Barzan gas project – a $5.4bn gas production joint venture between Qatar and ExxonMobil. Among the 30 banks which participated in the deal were a number of expanding Asian institutions, such as Sumitomo Mitsui, Mizuho Corporate Bank and Bank of Tokyo-Mitsubishi. With the growth of regional banking sectors in recent years, more local players are now thought to be well placed to enter the market gaps left open by the retreat of European capital.
Ready for Action
The relative paucity of lending opportunities since the revolution of 2011 means that Egypt’s banks are well positioned to take new project finance deals onto their balance sheets. The spare capacity in the system is made apparent by the trend of the loans-to-deposit (LTD) ratio since that time. In 2011 the aggregate LTD ratio for the sector stood at 50.2%, according to central bank data, showing that banks were lending about the same amount as they were taking in as deposits. To place this in perspective, the aggregate LTD ratio for the UK banks in the same year stood at nearly 120%.
While financial institutions in developed markets such as Europe and America have reined in their credit exposure during the intervening years, in 2014 the aggregate LTD ratio of the UK’s lenders was still in excess of 100%. Egypt’s already conservative lending profile has become even more so: in the years following the revolution the sector’s LTD ratio declined to reach a low of 40.4% at the close of 2014.
Given the levels of liquidity available in the sector, the mood of optimism surrounding project finance is unsurprising. “Egyptian banks are capable of participating in the funding of mega-projects by offering syndicated loans… the banks are ready to participate in all projects announced at the investment summit,” Akram Tinawi, managing director and CEO of Arab Banking Corporation, told the press in April 2015.
The energy industry in Egypt is likely to be of particular interest to lenders in the coming months of 2016, thanks to the government’s prioritisation of the sector as it implements measures to tackle the nation’s electricity shortfall. Tarek El Refai, managing director of Barclays Egypt, told OBG, “The recent growth of energy efficiency and the government focus on renewable energy mean that areas such as wind and solar power will become increasingly more important for banks in the near future.”