EUR 22.34 For Business Accounts Only

Egypt: Monetary framework monitor | Easing inflation echoes stable policy rates in ST

Liquidity management to remain key in steering policy. The CBE’s net absorption of EGP1.8bn in Nov-21 (via Corridor Linked Deposits, the main OMO tool), compares to the large absorption of EGP118bn in Oct-21, possibly on excess liquidity directed to local debt. In Nov-21, foreign portfolio outflows recorded USD1bn, as per market intelligence. Meanwhile, we estimate FCY buffers to reach USD54bn in Nov-21 (vs. USD52.6bn in Oct-21e), on a USD3bn Islamic-green loan, implying a FCY cash cover ratio of 0.94 (rising by 0.1 for the third consecutive month) vs. our calculated threshold of 1x required for FX stability. Liquidity management should continue in the short-term, in our view, restoring the FCY cash cover and mitigating potential EGP weakness as the Omicron COVID-19 variant possibly weighs on tourism activity. We expect the CBE to keep policy rates unchanged in the 16 December MPC.

Mitigated currency pressures over ST. We see Dec-21 inflation to remain below 7% y-o-y (CBE’s mid target), supported by Nov-21 headline inflation reading 0.1% m-o-m vs. our expectation of 0.5% (core inflation up 0.5% vs. 2.1% in Oct-21, indicating eased inflation does not only attribute to volatile items). We maintain a stable FX outlook over the short-term, supported by: i) contained inflation, ii) tapping new debt, and iii) liquidity absorption. In 1H22e, we estimate an average monthly BOP financing need of USD2bn, to be offset through external debt and passive portfolio flows.

Stable yields, yet more attractive in real terms. Average T-bill yields stand at 12.79%, as of 7 Dec-21, slightly unchanged m-o-m (-10bps y-t-d), and -40bps y-o-y (of a total of -149bps from Feb-20 vs. 400bps of total cuts in 2020). Egypt continues to outperform peers, with a high spot real yield of 7.8% vs. an EM average of 1.4% (excluding outliers), offering the highest inflation-adjusted rate of 3.2%, followed by Indonesia. This confirms its favourable position on the carry trade front.

External debt should offset lower carry trade appetite. Potential passive flows of USD4bn, upon inclusion in the JP Morgan GBI-EM index in Feb-22, are likely to be phased out by a lower active appetite, on adverse global dynamics. However, lower debt repayments due in 2022 (USD15.7bn vs. USD20.7bn in 2021) should relieve this mounting pressure and provide the government with USD10-12bn of external debt borrowing capacity, while still maintaining a downward external debt/GDP trend (to 33% in FY22e from 34% in FY21e).