Egypt’s reviving tourism to prop up banking sector: Moody’s

JEDDAH: A 51 percent year-on-year increase in tourist arrivals in the first quarter of 2017 is likely to prop up the banking sector in Egypt, said a report issued by Moody’s Investors Service.
The increase in foreign-currency flow from tourism will boost Egyptian banks’ limited access to foreign currencies, improving their capacity to meet clients’ foreign-currency needs.
“Tourism in Egypt has great potential and has traditionally been a major economic force in Egypt,” said Melina Skouridou, an assistant vice president at Moody’s.
Tourism, she added, accounted for 19.5 percent of gross domestic product (GDP) at its peak in 2007.
The report said that the increase in tourism is positive for Egyptian banks because it enhances the repayment capacity of borrowers directly and indirectly linked to tourism.
Revenues from tourism increased 9 percent 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 (WTTC), tourism directly accounted for 3.2 percent of Egypt’s GDP and 2.9 percent of employment in 2016. However, its total contribution including indirect effects on the economy was higher at 7.2 percent of GDP.
According to the report, 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,” said Skouridou.
Among Moody’s-rated banks, Commercial International Bank is expected to benefit the most from an increase in tourism because it has the largest exposure to the sector, with around 8 percent of its total loans exposed to tourism, which is higher than the 3 percent system average.
The report said that the bank’s ratio of non-performing loans (NPL) to gross loans increased to 5.28 percent as of September 2016 from 3.97 percent 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 percent was further exacerbated by the floatation of the Egyptian pound, which resulted in higher inflation and higher interest rates,” it added.
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 percent) will help contain further asset quality deterioration.
Egypt’s economy has been struggling since a 2011 uprising drove foreign investors and tourists away, but the government hopes a $12 billion International Monetary Fund (IMF) lending program signed last year will put it on the road to recovery.

— With input from Reuters