• Reserves resume drop in July; weak macro conditions sustain Foreign reserves fell USD6.6bn to USD564bn in July, and are down USD53bn in 2016 YTD. Net government claims on the banking system continued to fall in July, however the M-o-M drop (USD3.7bn) was less than that of net foreign assets (USD7.2bn). The depletion of foreign assets continues to pressure domestic liquidity, with all monetary aggregates showing annual contractions in July. Imports continue to weaken following Ramadan, with new LCs opened down 32.4% Y-o-Y, the lowest since June 2006.
• Sector deposit base remains volatile; loan book shrinks Sector deposit base remains volatile; July was the fifth time in seven months this year that deposits have declined M-o-M, at -0.8% M-o-M. The decline was led by private sector deposits, which fell 1.6% M-o-M, while deposits from government entities rose 1.5% M-o-M. Sector LDR edged up marginally, rising to 90.5% in July versus 90.2% in June as sector loans declined by 0.5%. July is likely to have been weak due to seasonality (Eid vacations, summer holidays). Banks however have become slightly more optimistic recently on 2016 sector loan growth and expect loan growth of 7-8% compared to guidance at the start of the year of 5-6. This is driven by expectations of a growing reliance on banks by the corporate sector to meet funding gaps. Samba remains our preferred pick in the sector due to its higher balance liquidity. The bank’s regulatory LDR was at 76% versus the sector average of 84% in 2Q16.
• POS & ATM transactions fall after showing signs of recovery last month The value of point-of-sale (POS) transactions contracted 16% Y-o-Y in July 2016 (-26% M-o-M), while ATM cash withdrawals fell 19% (-25% M-o-M). Combined, the value of POS & ATM transactions declined 19% Y-o-Y (-25% M-o-M) after seeing single-digit growth in the past two months (three-month rolling average -3% Y-o-Y). We believe the large decline is mainly due to Ramadan timing differences (July 2015 had c10 more Ramadan days), indicating that the improvement in June numbers is likely unsustainable and that consumption trends will continue to be pressured by subsidy reforms and limited wage growth.

Mohamed Abu Basha
Murad Ansari
Hatem Alaa, CFA