Egyptian tax change could spur banks to step up private lending
CAIRO: A proposed change to the way Egypt taxes bank profits could encourage lenders to boost credit to the private sector and push up yields on Treasury debt, raising its appeal among foreign investors, analysts say.
The cabinet last week gave preliminary approval to a proposed amendment to the way bank taxes are calculated by scrapping a provision that lets local banks deduct taxes already paid on treasuries from their bottom line income tax.
If a final version of the measure is approved by parliament in the coming months as is widely expected, it would raise the cost of buying government securities and could induce banking entities to divert funds away from treasuries to other sectors.
“The law would push banks to lend more toward the private sector,” said Hany Farahat, Senior Economist at investment bank CI Capital.
Egyptian banks have for years been top-heavy on government lending at the expense of the private sector, economists say.
Banks held 2.35 trillion Egyptian pounds ($131.58 billion) in government securities at the end of September compared with 804.8 billion pounds in outstanding loans to the private business sector.
The proposed tax change, which hit local banking stocks when it was announced on Sunday, could also put pressure on the Finance Ministry to allow Treasury yields to rise as it seeks to finance a budget deficit that was 9.8 per cent of GDP in the fiscal year ending June 2018.
“The new bank levy may increase the T-bill rates by 200 bps (basis points) as they see higher pre-tax yields,” investment bank Arqaam Capital said. This could bring in more foreign investors.
“The strong outflow of foreign capital in the T-bill market may now slow, however, or potentially reverse if rates on T-bills were now to be pushed back upwards, which in turn would make the carry trade more attractive,” the note added.
Foreign investors cut their holdings in Egyptian treasury bills and bonds by $8 billion in the six months ending September to $13 billion, part of a global exit from emerging market debt.