EUR 23.21 For Business Accounts Only

Egypt | A read into CBE’s pivotal MPC; Revise 2022 picks

Monetary framework update in surprise meeting. In a surprise meeting on 21 Mar-22, the MPC raised policy rates by 100bps. Simultaneously, state-owned banks introduced one-year CDs at an 18% rate. The monetary combination should mitigate inflationary pressures on real income and lend support to economic activity amid tighter monetary policy. That said, we expect further 150-200bps rate hikes throughout 2022, to sustain positive real yields, as we see inflation averaging 11-12% during the year. Provided there are FCY flows amounting to USD15-20bn, we foresee the EGP:USD stabilising at EGP17.5-18. Banks are among the main beneficiaries from this policy mix, and we revise our 2022 Egypt picks (detailed within report).

Restoration of FCY buffers is critical to our FX view. We calculate FCY buffers at USD44bn in Jan-22 (vs. USD48bn inDec-21), implying a FCY cash cover ratio of 0.79x (0.86x in Dec-21) vs. our calculated threshold of 1x required for FX stability. All else constant, this implies a total funding need of USD15-20bn. We expect this to be secured through bilateral deals with the GCC and a potential IMF agreement, followed by international debt issuances as risk metrics improve.

Investment driven policies key for external sustainability. Reinstating market confidence and positive sentiment is pending the government’s announcement of structural reforms and sectoral incentives that aim to encourage FDI and private investment. Initial gauges indicate government willingness to improve the investment environment. On the fixed income investment front, we expect yields to mimic policy hikes to maintain favourable real yields. We believe a positive real yield of 2-3% is likely a comfortable level for the government to strike the balance between relative attractiveness and higher cost of debt.

Fiscal reform on the way, but impact contained. Annual salary and pension increases were also announced yesterday, protecting low-income brackets from what we expect would be imminent fiscal consolidation decisions. We expect the Apr-22 fuel indexation committee to decide on an upward revision to the price of diesel, which is widely used in bulk road transport and so has high price transmission, particularly into food. Our CPI estimates price in: i) a 10% upward diesel price revision, which should translate into a 1% rise in annual CPI, and ii) the 50% decided increase in the bread loaf price adding a further 1%. The rise in yields has a marginal impact on debt servicing costs, with every 1% increase adding a yearly EGP16bn (EGP4bn quarterly, implying less than 0.05% higher deficit to GDP for the full year). Together, the support packages and additional debt cost should fall largely within the EGP70bn budget contingent allocation.