Egypt: currency, sovereign, banking risks intertwine

The falls in the Egyptian pound over the past year have increased the size of commercial banks’ net FX assets, but what has flown under the radar is banks’ growing exposure to the government’s FX debt. So long as the authorities get the IMF deal back on track, this is unlikely to result in major problems. But the risk now is that a disorderly currency adjustment that makes it difficult for the sovereign to pay its debts could have spillover effects to the banking sector.