Egypt: MPC likely to hold rates in Q1

As the first MPC meeting of the year approaches, Egyptian policy makers should be able to maintain the status quo for now, despite a global trend towards tighter monetary policy that has been accelerating over the past several months. While price pressures have weighed on activity in Egypt through the close of 2021 (as evidenced in PMI surveys) some of these appear to have eased, and headline inflation has remained well within the central bank’s target range. As such we expect that that the bank will lean towards supporting growth for now, especially as the Omicron variant threatens the near-term recovery.

Given the pressures that global tightening potentially holds for money flows in Egypt, especially in terms of international holdings of local debt, we continue to think a rate cut by the CBE at this stage is highly unlikely. International risk appetite towards emerging markets has diminished and is likely to remain vulnerable with the US set to raise rates sooner and perhaps more aggressively than had been expected this year. In these conditions, even were inflation to pull back from present levels, we believe that the CBE would look to maintain its especially attractive real interest rate as compared to its peers. That said, the outlook for portfolio inflows into Egypt overall is fairly constructive given the upcoming reinclusion on the JP Morgan EM bond index that will see substantial volumes of passive investment inflows.

Real interest rates will remain positive

Source: Bloomberg, Emirates NBD Research

At the same time, we see no major driver towards hiking at either the February 4 or the March 24 meetings, and we have pushed back our rate hike expectations, now anticipating a 25bps rise in the overnight deposit rate to 8.50% in the second quarter, with the risks to this view mounting in favour of holding pat. Headline CPI inflation moderated in November and December, dropping back to 5.6% and 5.9%, from 6.6% in September, and this was borne out in the PMI survey for Egypt also. In the December survey, the pace of acceleration in both purchase prices and staff costs slowed, with firms benefitting from softer commodity price rises and a weaker uptick in wages. This saw output prices rise at a softer rate also, with that subcomponent at a three-month low, which should see CPI inflation continue to moderate.

Foreign ownership of t-bills, USDbn

Source: Haver Analytics, Bloomberg, Emirates NBD Research

Nevertheless, we maintain our expectation that the next move by the CBE will be higher, especially as the Federal Reserve looks to be accelerating its rate hike projections. While a repetition of the taper tantrum of 2013 appears unlikely at this stage, the much faster than anticipated tightening will exert pressure on EMs. While the EGP has remained stable around its EGP 15.70/USD level, NDFs have risen this month. Further, while headline inflation has softened compared to several months ago, the core inflation rate has continued to rise steadily, and at 6.0% in December was at its highest level since mid-2019.

Exchange rate, EGP/USD

Source: Bloomberg, Emirates NBD Research

With regards the pound, we hold to our view that a devaluation or any significant level of depreciation remains off the cards for now, anticipating a measured move towards EGP 16.00 by year-end as global pressures exert themselves, but with the risks to this view weighted towards ongoing stability. A sharp exit of foreign debt ownership would exert pressure on the currency but given Egypt’s relative attractiveness and our expectation that the CBE will remain responsive and ready to move rates higher, we think the risks on this end are manageable, especially given the aforementioned inclusion on the JP Morgan index and its anticipated portfolio inflows. Further, we anticipate that FX inflows on the current account will continue to improve, with travel receipts especially set to rebound this year. At USD 1.7bn in Q2 last year they remained significantly down on corresponding pre-pandemic levels (USD 3.2bn in Q2 2019), but as pandemic pressures ease (notwithstanding the current wave as the year begins) and international travel recovers, so should the current account deficit which we forecast at -4.1% of GDP this fiscal year ending in June.