EUR 44.13 For Business Accounts Only

Egypt macro | Poised liquidity impetus, key to strike balance between prompting activity, foreign financing

Monetary policy framework lends support to activity, potentially requiring higher FCY financing. In line with our thesis, a change in liquidity management to a more accommodating policy has been materialising since beginning-2020. This was evident by the decrease in liquidity absorption through the CBE’s open market operations (OMO), reaching 7% of GDP in Jul-20 vs.15% in Jun-19. We expect the policy mix to remain broadly stable until end-2020, with interest rates unchanged and money in circulation growing by 1.5% m-o-m in 2020e (vs. an average monthly increase of 1% in 2019), easing pressure on activity. Beyond 2020e, securing foreign currency financing, through debt and capital flows (estimated at a net increase of USD1bn/month after fulfilling funding needs), is crucial to maintaining liquidity and activity momentum without compromising exchange rate steadiness.
 
Favourable inflation, sufficient foreign cash cover, key for the policy. We base our calculation for money supply forecasts on: i) maintaining a domestic inflation target, and ii) assuring healthy foreign currency cash cover (i.e. available FCY resources/EGP in circulation). As such, we expect the overall liquidity strategy to be: i) expansionary in FY20/21e, relative to 2019 (yet at a slower pace than 2Q20, bound by foreign currency cash cover), supported by favourable inflation figures (4.2% currently vs. the CBE’s target of 9%+/-3%), and ii) conditioned on sustainable net FCY inflows. We do not see the economy reaching a normalised state before 3Q21, allowing room for more liquidity management manoeuvrability and reprioritising price stability. We expect real GDP growth to pick up to 4% in FY20/21e vs. 3.5% in FY19/20.
 
Carry trade recovery paves way for sound external position. We expect BoP to run at an average current account deficit of USD1.4bn/month (4.5% of GDP) in FY20/21, down to USD700mn/month (2.2% of GDP) in FY21/22e. While capital account grows USD1.6bn/month on average in FY20/21, mainly on foreign portfolio flows, allowing buffer restoration to USD60bn by Jul-21 (10.5 month of coverage), in line with the Feb-20 figure. This is achieved through maintaining competitive risk-adjusted and real yields vs. EM peers to sustain EGP carry trade attractiveness, (EGP gross real yield is currently at a spread of c5% vs. peers). We expect gross yields on government treasuries and the EGP to remain stable until 1Q21e, while looking for a currency depreciation of 2-5% p.a. afterwards.
 
Debt to rise by c10pp/GDP, on backdrop of COVID-19. We expect deficit and external funding needs to raise external debt to 40% of GDP, and total debt to 95% of GDP in FY20/21e vs. 83% in FY18/19. A higher-than-expected fiscal support package, already not accounted for in the budget, and foreign financing needs would interrupt the downward trend of deficit contraction (8% of GDP in FY20/21e, first increase in six years) and weigh on overall debt levels.