Moody’s Investors Service, a leading credit rating agency, has upgraded its outlook for Egypt’s banking system to positive from stable as economic growth revives, bolstering credit growth, banks’ profitability, and internal capital generation, Invest-Gate reports.

“Increased domestic private sector investment, large infrastructure projects, as well as higher exports will drive economic growth and credit demand,” Moody’s Assistant Vice President Melina Skouridou was quoted as saying in an official statement on October 10.

The positive outlook was driven by strong links between the banks’ and Egyptian government’s “(B3positive) improving credit profile,” because of the substantial exposure of Egypt’s banks on the country, via investments in securities and loans, “which stood at 40% of total banking system assets as of June 2018,” according to the statement.

Other key drivers of Moody’s positive outlook for the Egyptian banking system is the improving operating environment, following the implementation of the economic reform program “that put the country on a path of sustainable and inclusive growth.”

In its statement, Moody’s expected Egypt’s loan quality to remain stable as new lending is tested, foreseeing the formation of non-performing loans (NPL) to keep on steady and the NPL ratio to stay broadly unaltered from total loans’ current levels of roughly 4.5% as of March 2018, as the improvement in asset quality from legacy exposures drops.

As per profitability, Moody’s stated it will remain strong, as increasing fees and commissions on new lending will aid banks’ pre-provision profit. “Loan-loss provisioning will be broadly stable for rated banks,” the agency added, anticipating the banks’ funding and liquidity profiles to stay strong.

“Egyptian banks will maintain high levels of liquid assets to ensure coverage of liquidity needs and deposit movements,” according to the statement.

“Egyptian banks’ capital buffers will improve only modestly as internally generated capital finances loan growth. Banks’ capital will improve modestly under Moody’s base-case scenario, but, is more vulnerable under the rating agency’s high-stress scenario, due to losses assumed on government securities,” the statement added.

In addition, Moody’s predicted that Egypt’s GDP growth will surge by up to 6% via increased private and public investments, higher exports, and recovering tourism.