EUR 51.52 For Business Accounts Only

Egypt Macro | Global risks persist, but buffers in place

Further drop in NFA a watch factor, challenges still contained. Outflows from EGP treasuries, on the back of global risk aversion, reduced banks’ NFA by USD7bn as of April. Net international reserves (NIR) remained intact, at USD44bn until September, as foreigners exited via local banks vs. the repatriation mechanism. Average monthly outflows of USD1-2bn/month, until 1Q19, will be comfortably absorbed by the CBE if needed, with its NFA peaking at USD17bn in August, in addition to having USD7bn in FX deposits excluded from NIR.

USD:EGP weakness or interest rate hikes unlikely, unless outflows intensify. This is mainly to: i) preserve monetary confidence, ii) prevent inflationary risks, and iii) minimise pressure on domestic activity. Higher treasury yields, interbank activity via public banks, and abandoning the repatriation mechanism are likely buffers. We expect a 3% cut in policy rates in 2019, as global risks potentially subside. However, if the NFA sheds >USD4bn vs. the average monthly USD1.5bn, as of May, USD:EGP weakening to the 18.5-19.5 or a 1-2% policy rate hike become likely. We still see REER 15-20% undervalued, but global conditions do not allow for USD:EGP appreciation. We revise our FY18/19 forecasts to 17.9 from 17.2.     

BoP performance key in FY18/19. NFA utilisation means low pressure on NIR. We expect the CA deficit/GDP at <3%, key to our FY18/19 view and compared to 2.7% last year. Local substitution of natural gas imports, tourism recovery, remittance inflows, bilateral loans, and Eurobonds will bring +USD20bn this year, a good cover for the USD18bn in pre-determined FX drains, all else constant. 2017 remittances topping FX sources at USD26bn, USD0.4bn> total export proceeds, dictates that banks sustain liberalised FCY access, a priority for the CBE even if FX pressures intensify, in our view, to prevent the re-emergence of parallel market activity.      

Growth intact, despite potential fiscal overruns. We expect GDP growth at 5.4% in FY18/19, up from 5.3% last year, conditional on sustained recovery in external activities, extractions, tourism, manufacturing, and construction. Brent trading around USD80-85/bbl >USD67/bbl, assumed in the FY18/19 budget, could cost the government EGP23bn in overruns. Current interest rates >14.7% budget assumption would cost another EGP58bn. This is a combined +1.3% above targeted fiscal deficit/GDP of 8.4% this year. Fuel subsidy cut of 20-30% is close, and not ruled out, by fuel-hedging prospects mulled by the MoF. Buoyant domestic liquidity minimises funding risks, and we expect T-bills to remain a key source of government borrowing.