CAIRO — Egypt's rate cut and easing inflation will

support bank revenue, Moody’s said.

On September 26, the Central Bank of Egypt (CBE) cut its benchmark interest rates by 100

basis points (bp), lowering the discount rate to 13.75%, a credit positive for banks.

With inflation now below the CBE's 9% target, Moody’s Investors Service 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 comment on the Egyptian banking sector.

Collectively, these developments will stimulate economic growth. We forecast Egypt's GDP will grow 5.6% in 2019 and 5.8% in 2020. Banks will also benefit from increased credit growth, which we

forecast will be more than 15% in 2020, while pressure on asset quality will remain subdued;

banks' nonperforming loans-to-gross-loans ratio was 4.1% as of March 2019.

Following Egypt’s currency flotation in November 2016, interest rates rose by 700 bp to 19.25% by July 2017, while inflation accelerated to 33% following reductions in the energy subsidy bill, which led to higher energy prices. As a result, consumption fell

and businesses postponed investment. The subsequent 550 bp cuts in interest rates since

their July 2017 peak and decline in inflation are reversing that situation. The CBE said annual

headline and core inflation continued to ease in August to 7.5% and 4.9%, respectively, their

lowest levels in six years, and below the central bank's inflation target of 9% plus or minus

three percentage points. That suggests further rate cuts are likely, Moody’s noted. — SG