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Egypt macro & strategy | Monetary easing resumes; Our high conviction call materialises

CBE cuts rates by 1% in a well-justified move, as we expected. This marks the beginning of the long awaited easing cycle, after holding rates for 7 consecutive meetings. We expect another 2% drop in policy rates during 1Q19 and 4Q19, as the CBE is likely to maintain rates in 3Q19, following the scheduled energy price hikes. Today’s policy rate cut illustrates the CBE’s confidence in Egypt’s economic outlook, despite global headwinds. The decision capitalises on improving FX, capital flows, and inflation dynamics, and bodes well with our favourable BoP during 2019. We believe taking this step, days following the IMF’s disbursement of the USD2bn loan tranche, signals the fund’s endorsement of an expansionary policy ahead.  

USD:EGP appreciated 2% in Jan-19, signalling today’s policy rate cut. Foreign inflows in treasuries recorded USD1bn in Jan-19, following 8 consecutive months of outflows, signalling banks’ NFA bottomed out at USD-6.3bn in Dec-18. The awaited issuance of USD5bn in Eurobonds and the received USD2bn from the IMF should boost FX reserves. Current account recovery, bilateral loans, and build-up in energy FDI should bring a total of USD21bn of inflows in 2019, sufficient to cover external debt repayments. Such positive dynamics lowered the EGP risk premium and facilitated a policy rate cut. The 1-year T-bill yield falling to 18.2% in Feb-19 from 19.97% in Dec-18 confirms our view.

Lower policy rates not a threat to foreign inflows or inflation. In our view, market expectations of an easing cycle will encourage FI investors to lock in high yields before further drops. Egypt’s debt market remains the most competitive among EM peers, offering >3% in real rates. As for inflation, we are unconcerned by the awaited indexation of Octane 95 in 2Q19, and expect limited impact of +2% on a monthly basis in case of a 25% fuel price hike in June (vs. +3.5% following Jul-18 hike). This is supported by the 20% drop in Brent prices, since Jul-18 to date, which resulted in a 20% increase of the cost recovery ratio of fuel products. The high base effect in Jul-18 should also help headline inflation remain contained moving forward.

Reiterate our Egypt strategy for 2019; Play liquidity beneficiaries. We rank banking, NBFS, and real estate as the top sectors, following the resumption of the monetary easing cycle. We favour CIB and Crédit Agricole Egypt (potential credit volume pick-up), EFG Hermes (rise in EGX turnover and growth in non-banking credit activity), and TMG and ODE (mixed exposure to real estate and tourism). We also flag Palm Hills Developments (high leverage; D/E of 62% and interest cost at c38% of EBITDA) and Juhayna (interest expense represents c30% of EBITDA) as key beneficiaries from the decline in interest rates.