Egyptian, Malaysian Banks Stand Strong amidst Global Financial Crisis

Cairo, Egypt | May 04, 2009 by D-8 Secretariat

IMF report cited Egypt banks provision of liquidity and the lowering of interest rates, saying the reserve had "acted appropriately"

Egypt’s banks appear to be weathering the global financial storm far better than many of their regional and international counterparts, due not only to the reform efforts of the Central Bank but also to the underlying strength and prudent management of domestic banks. The Egyptian Central Bank and its policies received special mention in the IMF’s latest World Economic Outlook, issued in mid-April, praising it for moving to cushion the impact of the global crisis. In particular, the IMF report cited the bank’s provision of liquidity and the lowering of interest rates, saying the reserve had “acted appropriately.”

That appropriate action included cutting overnight lending rates to 12 percent in late March, thus making capital more accessible to private banks in a bid to stimulate lending. The reduction followed a cut in interest rates in February of 100 basis points, reversing a series of increases aimed at curbing inflationary pressures.

Among the longer-term measures promoted by the Central Bank and the Ministry of Finance was a consolidation of the financial sector, through the raising of the capital requirements of banks and the privatization of a number of state-owned institutions. This brought about a series of mergers in the sector, with the number of banks falling from more than 60 nine years ago to just 40 today.

Though the Central Bank has cuts its rates, it still has to be wary of increasing liquidity to the point where it starts to overheat domestic demand. Inflation has been a massive issue for Egypt, and while it fell from 22 percent in July last year to 11.6 percent at the end of March, the reserve has to tread a fine line between stimulating the economy, providing it with the liquidity to maintain growth, and over-priming the pump.

After its latest rates cut, on March 27, the Central Bank warned that inflation had not yet been fully brought under control.

“It is important to emphasize that the sharp retrenchment in international commodity prices, which had begun in the second half of 2008, has not been fully reflected in domestic price levels due to the downward price rigidities in domestic markets,” the bank said in a statement announcing the rates reduction.

While Egypt is faring better than most in these turbulent times, the Central Bank also noted that the slowing global economy could have “unfavorable repercussions on the domestic growth outlook.”

Though the Egyptian economy is expected to grow at a comparatively healthy rate in 2009, with the IMF predicting GDP to expand by 3.6 percent, this is still just half of the growth rate of the preceding two years. This deceleration will affect Egypt’s banks, with applications for loans and export credits already dropping, according to Salwa El Antari, the general manager of the National Bank of Egypt’s research department.

“There is slower lending activity not merely because it is becoming harder to find creditworthy clients, but there is also less demand for loans to expand or open new businesses,” she said in an interview with the local press on April 23.

Egypt’s banks have also benefited from their low exposure to the toxic asset market, with most institutions focusing on domestic investments and thus avoiding any involvement in risky instruments like derivatives and securitized bonds.

This prudent approach was highlighted in a report released in February by Global Investment House, the Kuwait-based financial services company, which said that while a slowdown of the Egyptian economy could pose risks to the local banking sector through a rise in loan defaults, the general outlook for the market was positive.

“With the banking sector being primarily influenced by the economic status of the country, we maintain a stable outlook for the industry in 2009,” the report said.

The global recession has certainly not slowed interest in Egypt’s banking sector from abroad either, with Dubai’s Mashreq Bank becoming the latest entrant to the market, launching retail operations at 10 branches on April 1.
Abdul Aziz Al Ghurair, Mashreq’s chief executive, said there was great potential for banking service penetration in the country.

“We believe that Egypt is the ideal platform to grow our business regionally,” he said. “The Egyptian banking sector is a key player in the growth of the country’s economy, especially in light of the remarkable GDP growth that has averaged 7 percent over the last two years.”
The slowdown of the Egyptian economy has meant that Mashreq is taking a slightly more cautious approach than previously planned, but overall Egypt’s banks should remain in positive territory this year buoyed by effective government regulation and monetary intervention. There will be less black in the ledgers over the coming year, but the inherent strength of the country’s financial system should ensure that very little red appears.

Malaysia holds key interest rate at 2%

Malaysia’s central bank kept its key interest rate at 2.0 percent Wednesday, saying the economy is expected to contract markedly in the first quarter of the year.

Malaysia’s Bank Negara said poor global economic conditions were adversely affecting Malaysia’s key exports and industrial production, in turn hitting the labour market and private sector activity. “The economy, therefore, is expected to record a marked contraction in the first quarter of 2009 (in upcoming results). These conditions are expected to prevail until the second quarter of the year,” it added.

However, the bank said it would not adjust the interest rate as the present monetary policy measures were “sufficient to provide support to domestic demand.” Bank Negara said the domestic economy was expected to improve in the second half of 2009, “supported by stabilisation in global economic conditions and the larger impetus from the implementation of the fiscal stimulus measures.”

D-8 organization is holding the 27th commissioners’ meeting in June 2009, where among the agenda are to provide opinions and experiences sharing platform among member countries on how to cope with the current financial crisis. D-8 Secretary General, Dipo Alam, said that there should also be another D-8 Central Bank Governors meeting such as held three years ago in Indonesia to further strenghten the outcome of the discussion of monetary and banking policies through fiscal packages in D-8 member countries.

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