The Central Bank of Egypt (CBE) has said that the measures taken by central banks and governments worldwide have facilitated the global financial conditions.
As a result, these measures mitigated the negative economic impacts of the novel coronavirus (COVID-19) pandemic, the CBE added in a monetary policy report issued last Thursday.
The CBE said that the prospects for growth in global economic activity in the near term are expected to be affected by the second wave of the pandemic and its containment measures.
At the same time, the development and distribution of special vaccines against COVID-19 may ease the prevailing uncertainty regarding the medium-term prospects for global economic activity growth.
It added, “Locally, it is expected that Egypt’s GDP growth rate would gradually recover, in line with expectations of a lower level of uncertainty regarding the outbreak of COVID-19 and its impact on economic activity”.
The CBE pointed out that the monetary and financial stimulus policies and structural reforms that have been aimed at the Egyptian economy would alleviate the negative consequences of the pandemic on the lower class. It would also support the recovery in economic activity once the spread of the pandemic is contained.
The global economic activity outlook is expected to be impacted in the very near term by the second wave of the COVID-19 pandemic and its related lock-down measures.
On the other hand, the continued development and roll-out of vaccines could ease the level of uncertainty regarding economic activity over the medium term.
Over the medium term, Egypt’s GDP growth is expected to recover albeit gradually, in line with the expected easing in uncertainty surrounding the pandemic and its impact on economic activity.
Furthermore, structural and stabilisation measures are expected to ease the impact of the disruption on the most vulnerable, and help support the recovery once the outbreak is contained.
International food price forecasts relevant to Egypt’s consumption basket are expected to increase in 2020 and 2021, with risks emanating from higher energy costs and biofuel policies, according to the World Bank.
Additionally, the outlook for Brent crude oil prices incorporated in the domestic inflation outlook slightly increased compared to the previously published Monetary Policy Report.
Nonetheless, Brent crude oil prices continue to be affected by weak recovery in global demand as a result of the COVID-19 pandemic, in addition to increased global supply.
Domestically, as cost-recovery for most fuel products has already been achieved, the pass-through of international oil prices to domestic inflation will be based on the quarterly review of fuel prices as part of the price indexation mechanism. This caps the price adjustments to domestic fuel prices to ±10 percentage points every quarter.
In July and October 2020, Egypt’s Fuel Automatic Pricing Committee decided to keep announced fuel prices unchanged.
Annual headline and core inflation rates accelerated in October 2020, but continued to reflect muted underlying inflationary pressures.
Annual headline urban inflation accelerated to 4.5% in October 2020 from 3.7% in September 2020, after declining to 3.4% in August 2020 from 4.2% in July 2020. The average annual headline inflation rate recorded 3.8% during the third quarter (Q3) of 2020, which is the lowest rate recorded since Q1 of 2006.
Higher annual inflation rates in both September and October 2020 were largely driven by higher annual contribution of food items, despite annual food inflation continuing to record negative rates.
It was also driven by higher non-food prices, but by a lesser extent. In October 2020, nearly 75% of the increase in the headline rate was driven by the increase of the annual contribution of food inflation. This comes after the lower annual contribution of food items supported lower annual headline inflation in both July and August 2020.
Additionally, annual core inflation increased for the third consecutive month in October 2020 to record 3.9%, from 3.3% in September 2020, 0.8% in August 2020 and 0.7% in July 2020.
The expected acceleration in September’s reading reflected the incurrence of a strong unfavourable base effect, due to the release of the 10th CPI series and its linking methodology with the 9th CPI series.
Meanwhile, the recent increase in October 2020 was attributed to the positive contribution of core food items, which came against a decline in the same category in the same month of the preceding year.
Annual food inflation has continued to exhibit negative rates since February 2020, except for April and June 2020.
October 2020 marked the fourth consecutive month for annual food inflation to register a deflationary reading, and the second consecutive month to witness an easing in the deflationary rate.
Annual food inflation recorded -0.7% in October 2020 and -2.6% in September 2020, after it declined to -4.1% in August 2020 from -1.5% in July 2020.
The softening of deflation in annual food prices in September and October 2020 was mainly driven by core food prices and by volatile food items, but to a lesser extent. In the meantime, the decline in food prices in August 2020 was driven by lower prices of volatile items, such as fresh vegetables, which came against their seasonal patterns for the second consecutive month.
Annual core food inflation, specifically, has continued to record negative rates since October 2019, except for April 2020 and October 2020. This has been evident by the muted monthly core food inflation rates.
However, October’s core food inflation reading reversed its negative trend due to the increase in poultry prices. Core food prices were impacted by the partial lockdown measures, which included a partial curfew and the closure of hotels and restaurants before being lifted gradually.
Put together, the precautionary measures had a noticeable effect on domestic inventory levels. Furthermore, according to a study released by the Central Agency for Public Mobilization and Statistics (CAPMAS), households resorted mainly to consuming cheaper food sources.
The CAPMAS study also revealed that households lowered their weekly consumption of meat, poultry, and fish, in response to the economic impacts of COVID-19 on their incomes.
Additionally, core food prices continued to be affected by the measures taken by the government to avoid any supply shortages, and by the release of the 10th CPI series and its linking methodology to the 9th series till August 2020 data.
Annual non-food inflation accelerated for the third consecutive month in October 2020 to record 6.9%, from 6.6% and 6.2% in September 2020 and August 2020, respectively.
This comes as it declined to 6.1% in July 2020 as result of a favourable base effect, and takes note of the fact that annual non-food inflation has remained broadly stable since June 2019, recording an average of 8.3% between June 2019 and June 2020.
The uptick in annual non-food inflation in October 2020 was mainly driven by the higher annual contribution of regulated and service items, both of which combined more than offset the lower annual contribution of retail items.
Meanwhile, September and August’s increases reflected mainly higher annual inflation of services items in September 2020 and of regulated items in August 2020.
With respect to key monthly developments, monthly headline inflation continued to reflect broadly muted inflationary pressures since February 2020, except in April 2020.
The subdued inflationary environment has been largely due to muted food inflationary pressures, as evident in five-month consecutive decline of food prices between May 2020 and September 2020.
The monthly inflation reading in October 2020 marked the first time in six months that food prices remained broadly stable. The monthly non-food inflation in the same month reflected the seasonal increase in education and education-related prices.
It also reflected higher marital services fees, clothing prices, as well as rental values, among others. Moreover, higher driving licence fees and the higher prices of both clothing and personal care products mainly drove September’s 2020 increase of non-food inflation.
Meanwhile, August’s 2020 increase of non-food inflation was mainly driven by higher prices of medical products, and higher railway and underground transportation costs.
Monthly domestic core food inflation diverged with the monthly international core food inflation in October 2020.
International core food prices have been declining since July 2020, except in August 2020, which is largely attributed to contractions in demand resulting from the COVID-19 pandemic. Changes in international core food prices from July to October were mainly driven by the fluctuations in red meat prices.
Economic activity of Egypt’s external environment contracted sharply in Q2 of 2020, recording -12.3%, compared to a -2.3% in the previous quarter. This was, in turn, the first contraction in the world economy since Q3 of 2009, affected mainly by the pandemic as well as the associated containment measures. The contraction is expected to continue in Q3 of 2020, albeit at a slower pace.
In advanced economies, the contraction of economic activity recorded -3.5% in Q3 of 2020, easing from the -10.3% in Q2 of 2020, but still deteriorating compared to -1.7% and 0.8% in Q1 of 2020 and Q4 of 2019, respectively.
Both the sharp deterioration in Q2 of 2020 and the subsequent relative ease in contraction in Q3 of 2020 were broad across the US, the EU, the UK, and Japan.
Meanwhile, economic activity in emerging economies also contracted in Q2 of 2020, recording -2.0% compared to -0.6% and 1.3% in Q1 of 2020 and Q4 of 2019, respectively.
This was driven by the continued economic contraction in Russia, India, and Brazil, which were more than enough to offset the recovery in China. The latest data for Q3 of 2020 showed that China continued to recover, while the contraction in Russia eased as well. The data further supports the slower pace of contraction in Q3 of 2020 for emerging economies.
The annual headline inflation of Egypt’s external environment stabilised at 1.3% in Q3 of 2020, after dropping substantially in Q2 of 2020. This compared to 2.3% in Q1 of 2020, thereby marking the lowest level since Q3 of 2009.
Inflation in advanced economies stabilised at 0.3% in Q3 of 2020, compared to the previous quarter, as the drop in inflation in the EU was offset by the increase in inflation in the US.
Inflation in Japan and the UK broadly stabilised, compared to Q2 of 2020. Meanwhile, inflation in emerging economies also stabilised at 3.5% in Q3 of 2020, compared to the previous quarter.
This was mainly due to the decline of the inflation rate in China, which offset the acceleration of the inflation rate in Russia, Brazil and India, compared to the previous quarter.
The contraction in global trade, which began in Q2 of 2019 and surged to record -14.4% in Q2 of 2020, largely as a result of the COVID-19 and the related lockdown measures, has eased to -4.2% in Q3 of 2020. This was, however, lower than the -3.1% recorded in Q1 of 2020 and the average of -0.5% in 2019.
After registering a peak of $44.7/barrel on average in August 2020, following the April 2020 trough of $18.4 /barrel, Brent crude oil prices declined slightly in September 2020. They broadly stabilised at that lower level to record an average of $40.1/barrel in the first two weeks of November 2020.
The decline in September was mainly due to increased supply, while the broad stability in October and the first two weeks of November was mainly due to a slight recovery in demand which offset the continued increase in supply.
Meanwhile, international food prices, using domestic CPI basket weights of core food items, continued to decline on annual terms since March 2020, with the exception of a marginal pickup in September 2020.
The price declines on annual terms were mainly attributed to a decline in poultry prices during this period, as well as red meat in October 2020.
The US’ Federal Reserve held its policy rates unchanged in November 2020, after cutting it by 150 basis points in March 2020, bringing it down to the levels that prevailed following the Global Financial Crisis in 2009.
Moreover, the Bank of England held its policy rates unchanged in November 2020, after cutting it by 65 basis points in March 2020 to nearly 0%. The European Central Bank (ECB) also kept its main refinancing operations rate and deposit facility rates unchanged at 0% and negative 0.5% in its last meeting in October 2020. Both of these were last changed in March 2016 and October 2019, respectively.
Furthermore, the three central banks’ balance sheets continued to expand via their asset purchase programmes, as well as other tools. These helped maintain favourable financial conditions following the COVID-19 global outbreak, as well as the associated containment measures.
After witnessing the sharpest reversal since 2008 in March 2020, following the pandemic’s outbreak as well as the associated containment measures, capital inflows into emerging markets resumed in May 2020.
Such resumption was mainly supported by the improvement in global financial conditions, which were associated with the counter-cyclical economic policy measures despite the present uncertainty.
Meanwhile, yields on Egyptian Eurobonds have broadly declined since May 2020, which are near to December 2019-February 2020 levels. This followed the substantial increase witnessed in March 2020 and April 2020, in line with the recent unfavourable sentiment on emerging markets due to the COVID-19 outbreak and the related containment measures.
Similarly, Egypt’s credit default swap (CDS) spreads decreased recently, despite still being above the pre-March 2020 levels. Nonetheless, the country’s CDS spreads remained relatively low compared to the majority of its peers with similar sovereign credit rating.
Furthermore, Fitch Ratings and S&P have reaffirmed their current credit rating for Egypt, while maintaining a ‘stable’ outlook in July 2020 and April 2020, respectively.
It is noteworthy to highlight that 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.
