Continuing the coronavirus (COVID-19) pandemic’s negative impact on global, emerging markets witnessed sharp capital outflow in March, the fiercest since 2008, according to the Central Bank of Egypt (CBE).
In its monetary policy report issued last weekend, the CBE, however, indicated that the Egyptian economy’s monetary and fiscal stimulus policies and structural reforms would mitigate the crisis’ negative consequences on the neediest social groups. The CBE added that they would support the local economic recovery as soon as the pandemic is contained.
MPC keeps policy rates unchanged
The CBE’s Monetary Policy Committee (MPC) decided during its meetings on 2 April and 14 May to keep its key policy rates unchanged. This follows its policy rate cut of 300 basis points (bps) during an unscheduled meeting on 16 March, to support economic activities in light of the global coronavirus-related developments. This was consistent with achieving the CBE’s inflation target of 9% (±3%) in the fourth quarter (Q4) of 2020, and price stability over the medium term.
Global and domestic economic activity in 2020 is expected to be negatively affected by the coronavirus outbreak and the commensurate containment measures. The severity and persistence of the shock will depend on the prevalence and intensity of the outbreak among other factors. Structural and stabilisation measures are expected to ease the impact of the disruption on the most vulnerable and help support the recovery once the pandemic is contained.
In addition, international food price forecasts relevant to Egypt’s consumption basket are expected to decline in 2020, more strongly compared to the previous monetary policy report before increasing slightly in 2021.
Furthermore, Brent crude oil prices incorporated in the domestic inflation outlook are expected to remain subdued. These will be driven mainly by low global demand due to lockdown measures imposed in many countries. This is set to occur even after OPEC and non-OPEC member countries forged an agreement to cut daily production by 9.7m barrels.
Domestically, as cost-recovery for most fuel products was reached, the pass-through of international oil prices to domestic inflation is based on the decisions of Egypt’s Fuel Automatic Pricing Committee. The committee is responsible for price indexation to underlying costs with quarterly adjustments capped by ±10% per adjustment.
In April, domestic prices for some fuel products were reduced with a magnitude that allows for the savings to be utilised in supporting higher costs expected from facing the outbreak, as per the committee’s announcement.
Sharpest capital outflow in emerging markets since 2008
In March 2020, capital flows into emerging markets witnessed the sharpest reversal since 2008, which continued in April 2020 for the third consecutive month, albeit at a slower pace. This was mainly due to increased risk aversion towards emerging markets following the Covid-19 global outbreak as well as the associated containment measures.
The CBE pointed out that the current account deficit broadly stabilised on annual terms in Q4 of 2019, after narrowing in Q3 of 2019 for the first time since Q2 of 2018. This was mainly due to the favourable contribution from remittances, the non-hydrocarbon trade deficit, and net investment income deficit. These offset the unfavourable contribution from the hydrocarbon trade deficit and net services surplus.
The deficit of net exports of goods and services widened on annual terms in Q4 of 2019 for the first time since Q1 of 2019. This was mainly due to the unfavourable contribution from both imports and exports of goods as well as services in Q4 of 2019, specifically regarding the hydrocarbon trade deficit and net services surplus, the CBE report said.
Meanwhile, the non-hydrocarbon trade deficit continued to improve on annual terms in Q4 of 2019, for the third consecutive quarter, though less rapidly compared to the previous quarter, thanks to improvement of exports as well as imports for the third consecutive quarter.
The hydrocarbon trade balance turned into a slight deficit in Q4 of 2019, compared to a surplus in Q4 of 2018. This was mainly due lower exports on annual terms in Q4 of 2019, for the second consecutive quarter, as well as higher imports on annual terms in Q4 of 2019, for the first time since Q3 of 2018.
Moreover, the CBE said that the net services surplus continued to decline on annual terms in Q4 of 2019, for the second consecutive quarter. This was mainly due to the unfavourable contribution from other services, transportation excluding Suez Canal receipts and net travel receipts which more than offset the favourable contribution from Suez Canal receipts. On the other hand, remittances continued to increase on annual terms in Q4 of 2019, for the second consecutive quarter.
Meanwhile, the financial account surplus improved in Q4 of 2019, for the first time since Q1 of 2019. This was mainly supported by portfolio flows, which recorded a net inflow in Q4 of 2019, compared to a net outflow in the previous quarter.
This was also supported by the $2bn worth of Eurobonds issued by the Ministry of Finance in November 2019. On the other hand, net foreign direct investment (FDI) declined on annual terms in Q4 of 2019, for the first time since Q3 of 2018.
Following the global coronavirus outbreak and the associated sharp portfolio flows reversal from emerging markets, including Egypt, the CBE decided to utilise $5.4bn from its net international reserve balances during March.
The move aimed to partially cover foreign portfolio investment outflows through the CBE’s FX repatriation mechanism, accommodate for the domestic market’s foreign currency needs to import strategic goods, and repay external debt service obligations. Accordingly, net international reserves declined to register $40.1bn in March.
Real GDP growth continues to stabilise at 5.6% in Q4 of 2019
In a related context, the CBE noted that the real GDP growth continued to stabilise at 5.6% in Q4 and the second half (H2) of 2019. This stands at the same level as fiscal year (FY) 2018/2019 and the highest since FY 2007/2008.
Private domestic demand continued to be the main driver of activity in Q4 of 2019 contributing by 2.4 percentage points (ppt.), despite moderating from Q3 of 2019. This was due to the slowdown in private investments which more than offset the pickup in private consumption.
Public domestic demand strongly rebounded contributing by 2.2 ppt, after contracting in Q3 of 2019, mainly driven by a rebound in public investments and to a lesser extent an increase in public consumption. Meanwhile the positive contribution of net exports stabilised at 1.0 ppt. after being on a declining trend since Q4 of 2018.
It explained that the real growth in gross domestic investments slowed down in Q4 of 2019 to 10.4%, after undergoing a trend of acceleration since Q1 of 2019, as the pickup in public investments was not enough to offset the slowdown in private investments.
Most major sectors contributed to the broad-based slowdown in private investments real growth to record 2.8%, including real estate, trade and non-petroleum manufacturing. Meanwhile, public investments picked up in Q4 of 2019 to record real growth of 19.7%, after contracting in the previous quarter. The pick-up was supported by investments in national projects.
The reported highlighted that the contribution of net exports stabilised in Q4 of 2019 as the contraction of both real imports and exports intensified and broadly offset each other.
Broad money growth continues to increase in 1Q 2020
With regards to the annual growth of broad money (M2), the CBE said it continued to pick up for the third consecutive quarter to record 14.2% in Q1 of 2020, after stabilising in 2Q 2019. It also follows a period of continued decline since the fading of the exchange rate revaluation effect to record 11.6% in Q1 of 2019, the lowest since Q4 of 2012.
The increase in fiscal deficit contribution in Q1 of 2020 was mainly reflected in higher contribution of domestic bank financing.
This has more than offset both the decline in contribution of foreign non-bank financing, which is consistent with the increased risk aversion towards emerging markets following the coronavirus outbreak, as well as the estimated decline in external financing contribution.
Tight real monetary conditions eased
The CBE stressed that the recent 300bps policy rate cut on 16 March supported the easing of tight real monetary conditions.
Excess liquidity levels have been declining since January 2020 to record an average of EGP 552bn during April 2020, compared to an average of EGP 746.1bn in Q4 of 2019.
Consequently, the drop in excess liquidity has led to an increase in interbank activity and the narrowing of the spread between the overnight interbank rate and the mid-corridor rate. This is compared to its long-term average of around negative 30bps.
Meanwhile, interbank rates have declined by 0.9x the 300bps policy rate cut in March 2020, supported by the suspension of all the open market operations’ auctions. The suspension was more than enough to offset the impact of the drop in excess liquidity.
Yields for the local currency government securities declined to record 10.1% (net of tax) on average in April 2020, the lowest since March 2016. This compares to the 11.6% recorded on average during December 2019, January 2020, and February 2020, prior to the 300bps policy rate cut on 16 March 2020.
The 1.5 ppt. decline in the weighted average yield was supported by the increase in demand, which was supported by the CBE’s suspension of all open market operations’ auctions. The suspension was more than enough to offset the drop in foreign demand, affected by the unfavourable sentiment on emerging markets amid the coronavirus outbreak.
Meanwhile, following the decline since the beginning of 2019, yields on Egyptian Eurobonds rose during March 2020 before slightly declining in April 2020. This came in line with the recent unfavourable sentiment on emerging markets due to the coronavirus outbreak.
Moreover, Egypt’s credit default swap spreads remained relatively low compared to the majority of peers with similar sovereign credit rating despite the recent increase.
Furthermore, Standard & Poor’s (S&P) has reaffirmed their current credit rating for Egypt while maintaining a stable outlook in April 2020. Egypt’s credit rating was upgraded by Moody’s and Fitch Ratings in April and March 2019, respectively, following the upgrade by S&P in May 2018.
In the banking sector, the CBE said that data up to March 2020 reflected partial transmission of the 300bps policy rate cut. New deposit rates inched up to record 10.2% in March 2020, compared to an average of 9.5% recorded during December 2019, January 2020, and February 2020.
The increase in new deposit rates was due to the re-introduction of the one-year saving certificates at 15% by public banks. Meanwhile, rates of new loans declined to record 13% in March 2020, compared to an average of 15.2% during December 2019, January 2020, and February 2020, reflecting a transmission in the magnitude of 0.7x the 300bps policy rate cut in March 2020.
