JP Morgan Securities anticipates Egypt’s headline inflation will decline to 4.9% in May, due to low commodity prices and the strong Egyptian Pound.
However, base effects could then push Consumer Price Index (CPI) inflation back to 5.8% in June, the end of fiscal year (FY) 2019/2020.
Egypt has nonetheless warned that inflation could rise to 9.8% in FY 2020/2021 if the pandemic continues until the end of the year.
While inflation rose to 5.9% over-year-ago (oya) in April from 5.1% in March, it remains below the Central Bank of Egypt (CBE) target.
The CPI rose 1.3% month–on-month (m-o-m), after a 0.7% gain in March, against the backdrop of Ramadan and the global coronavirus (COVID-19) pandemic.
Price pressures across sectors were mixed, reflecting the pandemic’s impact. Transport prices fell sharply as the authorities reflected the global energy price crash in domestic prices. Annual core inflation remained near its lowest levels since 2006, at 2.5% oya.
The latest data indicates that foreign holdings of T-bills fell from $20bn in February to $9.5bn in March.
Capital outflows continued at a slower pace in April. The adverse balance of payments developments due to the pandemic have forced the authorities to seek IMF assistance, which was approved earlier this month.
Egypt received $2.7bn, or 100% its quota, in IMF funds under the Rapid Financing Instrument, as well as a yet unspecified amount under a new stand-by arrangement.
Accordingly, JP Morgan Securities expects the external funds to support the Egyptian Pound and help keep inflation low. Over the longer term, however, the Egyptian Pound’s path will hinge on the authorities’ ability to contain the pandemic and the engines of foreign exchange (FX) generation in the economy to restart.
Standard Chartered said that the CBE left its overnight deposit rate unchanged at 9.25%, in line with consensus expectations.
April urban CPI inflation of 5.9% year-on-year (y-o-y) remains well within target and near-term growth is likely to soften.
However, capital outflows of roughly $17bn over March and April have pushed FX reserves down by about 18% to $37bn.
Standard Chartered noted that policy makers navigate balance-of-payment (BoP) shocks, while preventing “disorderly” moves in FX markets. The bank projected that further rate cuts appear unlikely in the near term.
“We raise our policy rate forecast to 9.25% for both FY2019/2020 and FY2020/2021 (8.25% and 6.25% prior), and this should allow for an average real policy rate of over 300bps in FY2020/2021, in our view,” Standard Chartered said. “We expect Egypt to tap the capital markets to bridge remaining BoP gaps after the country has secured a Stand-By Arrangement (SBA).”
