Emirates NBD Egypt economic update

02/09/2014 11:29 AST

“The Central Bank of Egypt (CBE) voted in favour of keeping interest rates on hold at its latest meeting on September 1, with the overnight deposit and lending rates remaining at 9.25 per cent and 10.25 per cent respectively. The decision follows the unexpected 100bps of tightening the CBE introduced in July.

“Ahead of the interest rate decision, the CBE also posted a note on its website stating that July’s inflation figures had been revised upwards. Consumer price inflation actually came in at 11.0 per cent y/y in the month, compared to the initial estimate of 10.6 per cent, and June’s final reading of 8.2 per cent. In month-on-month terms, prices rose 3.5 per cent in July. In addition, core inflation jumped to 9.5 per cent y/y, compared to 8.8 per cent in June. Energy subsidy reforms were the main cause of the spike in inflation, and contributed 1.5pp to the monthly CPI print, according to the central bank. Our end-2014 inflation forecast is 11.0 per cent, however this latest data implies that risks to this projection are to the upside.

“According to CBE Governor Hisham Ramez, Egypt’s stock of FX reserves was unchanged in August, which would put them at $16.7 billion. Under our calculations, this equates to roughly 3.1 months of goods imports, and 2.5 months of goods and services imports. Governor Ramez also stated that by November, Egypt would repay Qatar $3 billion in loans previously extended by the Gulf state. As the CBE’s stock of liquid FX stands at only $12.7 billion, we expect this decision was made with the belief that additional aid from the GCC will be forthcoming.

“More importantly perhaps, Ramez also stated that between mid-July and the end of August, foreigners bought the equivalent of $120 million of local Egyptian debt. Although this would still equate to only 0.2 per cent of total outstanding t-bills, it would also represent one of the largest uptakes in local debt by foreigners since 2010. A revival of foreign private sector capital inflows would be an encouraging development, signalling greater confidence in the economic outlook and helping to support balance of payments stability. The drastic compression in Egyptian sovereign bond yields in recent months seems to reflect how sentiment has already turned a corner.

“Despite the improvement in sentiment, the CBE does not appear willing to allow market forces to determine the near-term direction of the Egyptian pound, which has remained around EGP 7.1511/USD since late May. With FX reserves remaining relatively low, a change in exchange rate policy should not be expected before the end of the year.”

CPI Financial