HC Securities & Investment assured that despite the increase in January’s inflation figure, they believe that inflationary pressures are highly contained within the CBE’s target of 9% (± 3%) for the fourth quarter of 2020 (4Q 2020) and they expect it to average 5.6% over the coming 4 months (February-May) before picking up to an average 8.9% over June-December; this will be due to seasonality and unfavourable base effects. Different economic indicators point to a suboptimal economic activity with unemployment increasing to 8.0% in 4Q 2019 from 7.8% in the previous quarter. Egypt’s PMI also came in at 46 in January, the lowest level in 2 years, indicating economic contraction. In HC’s views, private sector loans seem to be held back by an anticipation of further interest rate cuts, in addition to the need for further policies promoting private sector growth.
Chief economist and banking analyst at HC, Monette Doss said, “Despite this, we expect the CBE to keep interest rates unchanged during its upcoming meeting before resuming monetary easing in its April meeting. Our expectation is based on (1) the drop in Egypt’s foreign currency deposits not included in net international reserves (NIR) to $4.41bn in January from $7.57bn in December going below its 2-year low of $5.20bn in January 2019. The decline in non-official reserves might be attributed to debt repayment rather than outflows from government treasuries since official announcements stated that foreign holding of Egyptian treasuries increased to $24bn in January from $22bn in the previous month; and (2) the benefits of keeping Egypt’s carry trade attractive.”
“We believe that Egypt’s carry trade is still attractive as it offers a high positive real interest rate compared to other emerging markets such as Turkey. We estimate Egypt’s 12-month real interest rate at a positive 3.59% (using the latest 12-month T-bill rate of 14.11%, our average 2020 inflation forecast of 7.7% and a 15% tax on Egyptian treasury holdings by US and European investors) compared to Turkey’s negative real interest rate of 0.92% (using the latest 14-month T-bill rate of 10.28%, Bloomberg 2020 inflation consensus estimate of 11.2% and factoring in that Turkish treasury holdings are tax-free), which suggests a positive interest rate differential of 4.51% in favour of Egypt. The 2 countries have similar risk profiles as implied by Egypt’s 5-year credit default swap (CDS) of 267, and Turkey’s 5-year CDS of 265,” Monette Doss added
On 16 January, the CBE’s Monetary Policy Committee (MPC) decided to keep interest rates unchanged after undertaking rate cuts of 150 bps,100 bps, and 100 bps in August, September and November 2019 respectively. Egypt’s annual headline inflation accelerated to 7.2% in January from 7.1% in the previous month, with monthly inflation increasing 0.7% compared to a decline of 0.2% in December. The MPC is due to meet on 20 February.
