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Egypt macro | Liquidity cycle brewing; EGX main catalyst

Our high conviction call materialising. In line with our expectations, , the outstanding balance of the CBE’s corridor linked deposits (CLD), currently serving as the main Open Market Operations (OMO) tool, dropped by EGP120bn (6.43% of banks’ consolidated loans), over the past two months, to EGP570bn. The pace of liquidity release surpassed our expectation of reaching this level by end-1Q20, signalling a potentially expedited pick-up in both credit and consumption activities. We had previously conditioned the effectiveness of the monetary transmission (i.e. impact of the 650bps cut since 1Q18) on the drop in the CLD balance by EGP200-220bn in FY19/20, which should trigger a more active utilisation on part of banks (LTD at 44%) over the coming months.

Improving liquidity dynamics imply c3-4% m-o-m jump in consolidated loans in Jan-20, well above 2019 average of 0.5%. On our calculations, banks’ deposits grew by >EGP90bn (net of RRR) over Dec-19 to Jan-20 (estimate Jan-20 figure using 2019 monthly average growth in deposits). This, in addition to the CLD drop of EGP120bn during the same period, brings liquidity available for utilisation to cEGP210bn. With local banks deploying only cEGP50bn in government debt (net issuances), we calculate banks’ gross loans likely grew by EGP112bn in Jan-20e, up from EGP47bn in Dec-19a. We expect the excess liquidity release to trigger real credit growth of 12.2% y-o-y in 2020e (vs. an average of -6.6% over the past three years), as we eye an additional cEGP100bn to be released through the CBE’s OMO by 3Q20.

Real wage recovery lend support to a robust credit cycle. We expect the inflation-wage differential to narrow to 1.5% in 2020e vs. 10.47% in 2017, to further support our credit activity outlook. Accordingly, we look for a strong recovery in consumption over the coming two years, with growth averaging 2.25% y-o-y. This compares to an anaemic growth over FY2016-19 (average 1% p.a.), on the back of an adverse monetary backdrop. Moreover, we expect investments to grow by 15% in FY19/20e (vs. 13.7% in FY18/19) and contribute 2.5% to our expected 5.8% GDP growth.

Expect EGX turnover to pick up by 20-30% in 2H20, monitor money supply progression. The stock market’s turnover has been declining since 2014 (turnover ratio stood at 31% in 2019, down from 54% in 2014), in line with the deceleration in real money supply (M2), which grew by 2% in 2019 (vs. 7% in 2014). We will keep an eye on the monthly progression in money supply throughout 2020, as a leading indicator for the potential pick-up in the stock market’s liquidity, given that locals (retail and institutions) represent c70% of trading activity. We expect M2 to grow by c15% in 2020e vs. 12% in 2019. The awaited improvement in the EGX turnover should be supported by the market’s undemanding valuation, currently trading at a 2020e PEG ratio of 0.48, a 47% discount to EM peers.