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Rising interest rates will help struggling Mena banks

The Central Bank of Morocco in Rabat Reuters/Youssef Boudlal
The Central Bank of Morocco in Rabat

Rising interest rates are likely to help major banks in Egypt, Morocco and Jordan to remain profitable in 2023 despite loan defaults increasing and a darkening global economic outlook, S&P Global Ratings forecasts. 

But banks in the three countries remain vulnerable because of higher funding costs, commodity prices and inflation and lower tourism revenue. 

The ratings agency said banks in Egypt were most vulnerable on the basis of an industry risk assessment score of nine, with 10 being the highest risk and one the lowest.

In comparison, Morocco scored seven and Jordan eight, while Saudi Arabia and the United Arab Emirates were rated four and five respectively. 

BICRA, economic risk and industry risk scores

Central banks across the Middle East and North Africa – like those in Europe and the US – have hiked interest rates in response to soaring inflation.

Egypt’s benchmark rate is up 800 basis points (bps) since the start of 2022, Jordan’s has increased 450 bps and Morocco’s is 100 bps higher.

Such increases benefit banks, which raise their lending rates faster than the rates they pay on savings accounts, boosting net interest margins.

That will enable profitability at Moroccan and Jordanian banks to eclipse 2019 pre-pandemic levels, while those of Egyptian banks will hit a four-year high, S&P forecast. 

As well as improving interest margins, banks’ loan books are also likely to expand this year, albeit at a slower pace than in 2022, as higher rates deter some would-be borrowers. 

“Continued growth in lending should also contribute to increased revenue,” S&P wrote in a report published this week.

“This will primarily be driven by demand for credit from corporates, which require funds to meet working capital needs that are likely to remain high due to sustained inflationary pressure and local currency devaluation, particularly in Egypt.”

The ratings agency forecasts Egypt’s buoyant construction and energy sectors will help the country’s real GDP expand by 4 percent this year, albeit down from last year’s 6.6 percent as a slump in the Egyptian pound depresses household spending. 

It also predicts Morocco’s real GDP will grow 3.4 percent and Jordan’s 2.4 percent. 

The biggest risks to banks’ performance in the three countries include a deterioration in their governments’ credit worthiness, a further spike in food and energy prices should the Ukraine conflict escalate, and the possibility of worse-than-expected loan defaults.

Higher borrowing costs, declining disposable income due to inflation and slowing economic growth will cause banks’ non-performing loans ratio – an important industry metric – to rise, S&P warns. 

“That increase will likely come from all sectors of the economy, though small and midsize enterprises and construction are most vulnerable,” the report stated.

“We expect the impact of that increase to remain broadly manageable.”