CAIRO, June 7 (Aswat Masriya) – Despite warning about the pressures on foreign currency liquidity resulting from the dollar shortage, Moody’s has maintained its stable outlook on Egypt’s banking system over the next year and a half.

Moody’s Investors Service said in a report published late Monday that the pressure on foreign currency liquidity could be partly mitigated by increasing foreign direct investment (FDI) in the medium term.

Foreign currency liquidity has come under more pressure due to a weakening tourism sector affected by a series of terrorism-related incidents including the crash of the Russian jetliner last October as well as lower foreign investment.

However, the Egyptian authorities' plans to revive the tourism industry were considered by Moody’s as "less likely to be successful" especially following the recent crash of the Egyptian airliner MS804 in May killing all 66 people on board.

According to Moody’s, FDI remains below the levels suggested by the investment deals struck during the March 2015 economic summit in Sharm al-Sheikh, which amounted to $38.2 billion.

Moody’s views the Central Bank’s devaluation of the Egyptian pound on March 14 and its adoption of a more flexible exchange rate regime as only a start as the agency expects further devaluation to the pound over the coming months. This would attract FDI and ease the pressure on the country’s foreign currency reserves, Moody’s said.

Egypt’s net foreign reserves have reached $17.5 billion as of May 2016. 

Egypt had roughly $36 billion in reserves before the January 2011 uprising that toppled president Hosni Mubarak and ended his 30-year rule.

But years of political turmoil have taken a toll on Egypt’s economy, halving the state’s foreign reserves and driving away tourists.

Although the March devaluation managed to temporarily eliminate the gap with the unofficial exchange rate, the official rate remains at around 15 per cent premium to the unofficial rate, Moody’s added. 

The Central Bank of Egypt (CBE) devalued the currency by 14.5 per cent against the U.S. dollar on March 14. Two days later, it raised the Egyptian pound by 7 piastres, to reach EGP 8.78 against the dollar.

Similar to Moody’s, Fitch Ratings previously stated that it expects a further devaluation of the Egyptian pound. It also said that the March devaluation would likely facilitate foreign currency liquidity in the domestic banking sector.

Moody’s expects Egypt’s economic growth to slow to 3.5 per cent for the fiscal year ending June 2016 before accelerating to 4 per cent in 2017 as a result of the increasing role of the private sector in the economy and attracting more FDI.

The Egyptian government’s expectations, however, were more optimistic, as it put this year’s growth rate at 4.4 per cent and next year’s at 5.2 per cent.

The budget deficit and government debt are expected to remain high while the country continues to face high unemployment and low income levels, Moody's said.

Egypt’s budget deficit rose to 9.2 per cent of the country's Gross Domestic Product (GDP) during the first nine months of the current fiscal year compared to 9 per cent during the same period last year, the finance ministry said on Thursday.

Credit rating agency Standard and Poor's reduced Egypt's rating to negative last month reflecting its view that "Egypt's external and fiscal vulnerabilities might increase further over the next 12 months."