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A curious place these days, Egypt. Politically, it continues to make liberal-minded observers queasy, whether for sentencing ousted – and democratically elected – Islamist president Mohamed Morsi and 105 others to death, or for imprisoning Al Jazeera journalists.
However, economically, there is a growing sense it is moving in the right direction.
In April, Moody’s upgraded the sovereign, finally changing direction after a decline of six notches in the three years between 2010 and 2013. Fitch and S&P had upgraded the country in late 2014.
It is growing – 2.7% a year between 2010 and 2014 is hardly Asian tiger territory, but it’s more than Tunisia and more or less the same as Jordan – and Moody’s projects real GDP growth of 4.5% in 2015 and 5% in 2016.
More to the point, its government has committed to a wide-ranging economic reform agenda and fiscal consolidation, while it maintains strong donor support.
Not that simple…
Does this mean happy days ahead for the banks – those that weathered the storm throughout, and the Gulf institutions like Qatar National Bank and National Bank of Kuwait that bought in to the country as the French and others abandoned it?
Well, a brighter economic outlook is always useful, but it’s not quite that simple.
Olivier Panis at Moody’s points out that 38% of Egyptian bank assets are government securities, meaning that Egypt’s tier-1 ratio for the banking sector, at around 11%, is potentially a little misleading, and that risk in the sector is actually higher.
There is a host of reasons to worry about credit quality: 9% NPLs today could be worsened by spillovers from Libya; domestic attacks by Islamic extremists; issues around inefficiency in the public sector; problems with ease of doing business; and weak growth in Europe, to name but a few.
And foreign portfolio flows are not yet flooding back into Egypt, accounting for about 2% of government securities rather than the pre-revolution highs of around 14%.
However, for the first time in years, there does seem to be reason for optimism if the state can stay on track with its reform commitments and the banks can grow loan books without taking too many risks.
Moreover, a steady improvement would be a great demonstration to other transitioning Arab Spring nations that it can be done.
Egypt might not have the flourishing peaceful democracy that protesters envisaged when they took to Tahrir Square in February 2011, but if it has an economy to employ people and a banking sector to lend to them, that’s a start.