EUR 38.73 For Business Accounts Only

Egypt macro | An orchestrated unfold of liquidity in the making, unleashing long-awaited economic potential

Expect the CBE to loosen grip on excess liquidity absorption in 1Q20. We expect 2020 to witness a strong transmission of the CBE monetary easing policy, which we believe should be complemented by additional 2.5-3% rate cuts throughout next year. We anticipate the CBE to loosen its grip on its excess liquidity absorption policy, with excess balance dropping to 8% of GDP in FY19/20e vs.14% in FY18/19. We look for the release of EGP220-250bn of the outstanding EGP650bn in the CBE’s corridor linked deposits, a prerequisite to kicking off the liquidity cycle, as we see it the optimum level to achieve a balanced growth. We anticipate that the CBE will frontload 50% of the estimated liquidity figure in 1Q20. Nevertheless, we expect the CBE to keep rates on hold for the remainder of 2019, on the rebounding inflation, allowing it to assess the impact of the latest rate cuts, thus saving further monetary ammunitions for next year.     

Credit activity is the main beneficiary, further supported by real wage recovery. We expect the release of the excess liquidity to trigger inflation-adjusted credit growth of 12.2% y-o-y in 2020e vs. an average of -6.6% over the past three years. An inflation-wage differential narrowing to 1.5% in 2020e vs. 10.47% in 2017, along with fiscal deficit narrowing, further enhances our credit growth outlook. This should allow credit to reach 58% of GDP in FY19/20e vs. 52% of GDP in FY18/19. As such, we see a pick-up in private investment, supported by a recovery in consumption at a later stage. On the sectoral front, manufacturing, wholesale, retail trade, tourism, real estate, education, and healthcare should contribute the most to the expected growth.

Expect EGP to remain stable in FY19/20, key to kicking off economic cycle. We do not see the liquidity release pressuring the EGP, as any short-lived volatilities can be funded through banks’ NFAs of up to USD10bn, similar to 2H18. A stable exchange rate is essential to stimulate the economic cycle without disrupting supply side factors, achieving non-inflationary growth. We expect the USD/EGP to average 17.11 in FY20/21, in line with the pick-up in demand activity. This is derived from our exchange rate model; we calculate that for every EGP1 spent domestically, EGP0.30 is directed to imports.

Sufficient buffers in place to absorb external shocks. Egypt’s strong capacity to shield against global headwinds comes on a robust external sector, keeping it resilient against external shocks. The CBE has strong FX capacity (reserves, deposits outside reserves, and positive NFA balance) amounting to USD75bn (30% of GDP), ready to be deployed in emergency situations.