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Egypt macro & strategy | CBE cuts policy rates at perfect timing; Eye 100bps cut in September meeting

CBE cuts rates by 1.50%, in line with our high conviction call. The CBE has exploited what we called the golden opportunity, cutting policy rates by 1.50%, which we called for in our latest MENA strategy note published on 16 July. This comes after the bank held rates for three consecutive meetings. Two successive single digit inflation readings (June and July) confirmed that headline and core inflation are structurally contained. Continuous inflows into treasury investments (up 81% y-t-d), and muted austerity measures for the coming period were sufficient for the CBE to cut rates at this time. Global factors also played a crucial role in the CBE’s decision, mainly as the Fed cut rates and Egypt’s risk metrics outperformed regional peers.                

Expect another 1% cut on 26 September, key to confirming monetary easing resumption. We deem necessary a second consecutive cut in policy rates, to mark the resumption of a monetary easing cycle, as a one and done rate cut would cast high doubts on the economic outlook, and disappoint both local and global investors. Tamed inflation and highly competitive EGP yields support our view of a second rate cut. We expect inflation to remain below the 9% mark over August-October 2019, on a high base effect and strong oversupply of fruits and vegetables. The deceleration in inflation allowed EGP yields to remain competitive on both nominal and real terms, making it one of the most profitable trades within EM space, in addition to topping Turkey and Ukraine. We expect Egypt to remain competitive, even post the 2% rate cut, with minimal risk of capital outflow.            

Egypt’s strong capacity to shield against global headwinds. We believe small economies that have low exposure to global trade are best positioned to manoeuvre current global economic volatility. Egypt’s current exports of goods and services represent 16.3% of GDP vs. an EM average of 54%. The CBE has strong FX capacity (reserves, deposits outside reserves, and positive NFA balance), amounting to USD75bn (30% of GDP), ready to be deployed at extreme emergency situations, namely extreme external shocks. Persistent global investor confidence should allow Egypt to easily access capital markets and continue with its debt replacement strategy, putting no pressure on the USD/EGP rate, in our view.

Reiterate our positive call on banks and real estate. Our portfolio of banking and real estate stocks recorded an average return of 13% during August, outperforming the EGX 30’s return by 6%. We continue to favour CIB, CAE, and EFG-Hermes from our financials coverage, while flagging SODIC, TMG, PHD, and ODE as key beneficiaries among real estate names.