Macroeconomic Shocks and Banking Sector Developments in Egypt

From 2008 to 2011, Egypt was hit by significant shocks, both global and country-specific. This paper assesses the impact of the resulting macroeconomic instability on the banking sector, and examines its role as a shock absorber. The Central Bank of Egypt accommodated the shocks by supplying liquidity to the market. The paper verifies a change in the fiscal regime from one in which the primary fiscal balance was used an instrument to stabilize the public debt ratio to one in which the policy instrument stopped playing that role and affected investors' assessment of the risk of holding public debt. This pattern suggests that fiscal conditions influenced exchange rate and price expectations originating a fiscal dominance situation in which the Central Bank could not control inflation. Hence, the Central Bank lacked functional independence in spite of its de jure independence, which underscores the importance of strengthening institutions that facilitate policy coordination and allow policy to be more predictable. The government also funds itself through non-market mechanisms, in a typical financial repression scheme. The paper estimates the revenue from financial repression at about 2.5 percent of gross domestic product in 2011, which together with the revenues from seignoriage add up to close to 50 percent of the budgeted tax revenues, indicating the need for an in-depth review of the governance of the public banks and the funding of public sector activities. Finally, the paper estimates the impact of shocks to macroeconomic variables on loan portfolio quality and bank capital.

Bibliographic Details

Main Authors:	Youssef, Hoda, Herrera, Santiago
Language:	English en_US
Published:	World Bank, Washington, DC 2013-01
Subjects:	ADMINISTRATIVE CONTROL, ADMINISTRATIVE CONTROLS, AGRICULTURAL CREDIT, ALTERNATIVE FUNDING, ASSET PRICES, BALANCE OF PAYMENTS, BALANCE OF PAYMENTS CRISIS, BALANCE SHEET, BALANCE SHEETS, BANK BRANCHES, BANK DEPOSIT, BANK DEPOSITS, BANK INTERMEDIATION, BANK LENDING, BANK LOAN, BANK PROFITABILITY, BANKING LAW, BANKING SECTOR, BANKING SECTOR DEVELOPMENTS, BANKING SYSTEM, BIDS, BONDS, BORROWING COSTS, BUDGET CONSTRAINT, BUDGET DEFICIT, CAPITAL ACCOUNT, CAPITAL ADEQUACY, CAPITAL BASE, CAPITAL FLOW, CAPITAL FLOWS, CAPITAL GAINS, CAPITAL INFLOW, CAPITAL INFLOWS, CAPITAL OUTFLOW, CAPITAL OUTFLOWS, CAPITAL REQUIREMENT, CAPITALIZATION, CASH FLOW, CASH HOLDING, CASH HOLDINGS, CENTRAL BANK, CERTIFICATES OF DEPOSIT, CHECKS, COMMERCIAL BANK, COMMERCIAL BANK CREDIT, COMMERCIAL BANKS, COMPETITIVE MARKETS, CREDIBILITY, CREDIT AVAILABILITY, CREDIT EXPANSION, CREDIT GROWTH, CREDIT RISK, DEBT ISSUER, DEBT LEVEL, DEBT LEVELS, DEBT RATIO, DEBT SERVICE, DEBTORS, DEBTS, DEFICITS, DEMAND FOR CREDIT, DEPOSIT, DEPOSITS, DEVELOPING COUNTRIES, DEVELOPMENT BONDS, DOMESTIC BANKS, DOMESTIC CAPITAL, DOMESTIC CAPITAL MARKETS, DOMESTIC CURRENCY, DOMESTIC DEBT, DUMMY VARIABLE, EMERGING ECONOMIES, EXCHANGE RATE, FINANCIAL CRISIS, FINANCIAL DEVELOPMENT, FINANCIAL INSTITUTIONS, FINANCIAL LIBERALIZATION, FINANCIAL MARKET, FINANCIAL MARKETS, FINANCIAL SECTOR DEVELOPMENTS, FINANCIAL SYSTEM, FISCAL DEFICIT, FISCAL POLICY, FIXED EXCHANGE RATE, FOREIGN BANK, FOREIGN CURRENCY, FOREIGN INVESTORS, FUTURE CREDIT, GLOBAL CAPITAL, GLOBAL CAPITAL MARKETS, GOVERNMENT ACCOUNTS, GOVERNMENT BONDS, GOVERNMENT BORROWING, GOVERNMENT BUDGET, GOVERNMENT DEBT, GOVERNMENT EXPENDITURES, GOVERNMENT PAPER, GOVERNMENT REVENUES, GOVERNMENT SAVINGS, GOVERNMENT SECURITIES, GOVERNMENT SPENDING, GROSS DOMESTIC PRODUCT, HOLDING, HOLDINGS, HOLDINGS OF GOVERNMENT SECURITIES, IMPLICIT TAX, IMPLICIT TAXES, INCOME TAX, INFLATION, INFLATION RATE, INFORMATION TECHNOLOGY, INSTRUMENT, INSURANCE, INSURANCE COMPANIES, INTEREST COSTS, INTEREST PAYMENTS, INTEREST RATE, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL CAPITAL, INTERNATIONAL CAPITAL MARKETS, INTERNATIONAL STANDARDS, INVESTMENT BANK, INVESTMENT IN GOVERNMENT SECURITIES, INVESTMENTS IN GOVERNMENT SECURITIES, ISSUANCE, JUDICIAL SYSTEM, LABOR MARKET, LEGAL FRAMEWORKS, LIQUIDITY, LIQUIDITY CRISES, LOAN, LOAN PORTFOLIO, LOAN QUALITY, LOANABLE FUNDS, LOCAL CURRENCY, LOCAL INVESTORS, LONG-TERM LOANS, MACROECONOMIC ENVIRONMENT, MACROECONOMIC INSTABILITY, MACROECONOMIC VARIABLES, MARKET BORROWING, MARKET FOR CREDIT, MARKET MECHANISMS, MARKET YIELDS, MATURITY, MATURITY STRUCTURE, MINIMUM CAPITAL REQUIREMENTS, MONETARY POLICY, MONEY MARKET, MONEY SUPPLY, MUTUAL FUNDS, NATIONAL INVESTMENT, NON-PERFORMING LOANS, NONPERFORMING LOANS, NPL, OIL PRICES, OPEN ECONOMY, OPEN MARKET, OUTSTANDING DEBT, OWNERSHIP STRUCTURE, POLITICAL UNCERTAINTY, PORTFOLIO QUALITY, POST OFFICE, POST OFFICE SAVINGS, PRICE CHANGES, PRICE STABILITY, PRIVATE BANKS, PRIVATE CREDIT, PRIVATE SECTOR CREDIT, PROBABILITY OF DEFAULT, PRODUCTIVE INVESTMENT, PRODUCTIVE INVESTMENTS, PRUDENTIAL REGULATIONS, PUBLIC BANK, PUBLIC BANKS, PUBLIC BUDGET, PUBLIC DEBT, PUBLIC DEBT HOLDINGS, PUBLIC FINANCE, PUBLIC FINANCES, PUBLIC INVESTMENT, PUBLIC SPENDING, REAL INTEREST, REAL INTEREST RATES, REGULATORY FRAMEWORK, REPO, REPO FACILITY, RESERVE, RESERVE REQUIREMENTS, RESERVES, RETURN, RETURNS, RISK MANAGEMENT, RISK OF DEFAULT, SAVINGS ACCOUNTS, SAVINGS DEPOSITS, SAVINGS INSTRUMENTS, SETTLEMENT, SOCIAL CAPITAL, SOCIAL INSURANCE FUND, SOLVENCY, SOVEREIGN ENTITIES, STATE BANKS, STOCK MARKET, STOCK MARKET INDEX, STRATEGIC INVESTOR, SUB-NATIONAL ENTITIES, SUPPLY OF CREDIT, T-BILL, T-BILL MARKET, T-BILL RATE, T-BILL RATES, T-BILLS, TAX, TAX RATE, TAX RATES, TAX SYSTEM, TRADE LIBERALIZATION, TRANSACTION, TRANSPARENCY,
Online Access:	http://documents.worldbank.org/curated/en/2013/01/17172327/macroeconomic-shocks-banking-sector-developments-egypt-macroeconomic-shocks-banking-sector-developments-egypt https://hdl.handle.net/10986/12179
Tags:	Add Tag No Tags, Be the first to tag this record!