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Egypt - Monetary framework monitor | Global volatility to dominate ST monetary approach

FCY buffers to withstand six-month slowdown in foreign portfolio flows. As of March, we expect foreigners to be net sellers, following suit of the stock market and other EM countries. This comes after February foreign holdings in local debt surpassed pre-pandemic levels, totalling USD28bn. February NIR reached USD40.2bn vs. USD45.5bn in Feb-20 and a 2020 bottom of USD36bn in May-20. Foreign currency buffers currently surpass 9x months of coverage, providing a safety net against slowed appetite, amid global volatility. We calculate the BOP may withstand a lack of any additional portfolio flows for six months. Furthermore, remittances recorded a 10.45% y-o-y increase in 2020, amounting to USD29.6bn; a trend that will be maintained in 2021e, on the pickup in oil demand and business activity, in our view.

400bps rate cuts in 2020 not fully reflective on yields; Inflation to imminently rise. Average T-bill yields currently stand at 13.27%, as of 16 March, down 1.03% y-o-y (14.30% in Mar-20), +38bps 2021 y-t-d. Meanwhile, average T-bond yields (five-year and ten-year) are currently at 14.58%, +33bps y-o-y, and +36bps y-t-d. Although headline inflation in February accelerated to 4.5% y-o-y vs. 4.3% in January, it remains well contained below the CBE’s lower target range of inflation (7% +/-2%) for two consecutive months. With demand rising in the pre-Ramadan season, we expect seasonal food inflation to drive 2Q21 headline inflation to 4.8-5%. Meanwhile, the surge in wheat and oil prices (+ 36% y-t-d) is another global force likely to stimulate domestic inflation, including a possible local hike in petroleum prices in the upcoming indexation (March). We reiterate our forecast of inflation accelerating to 6.5% in 2021, with the resumption of money supply growth momentum.

EGP carry trade remains favourable relative to EM. Egypt continues to outperform EM peers, offering a real yield of 8.85% vs. -1.04% and 5.69% for Turkey and Ukraine, respectively. In contrast to Egypt, Turkey’s inflation figures continued to accelerate to 15.62% in February, marking an 18-month high, significantly exceeding its 8% target for 2021. Accordingly, the Central Bank of the Republic of Turkey (CBRT) is hard-pressed to contain inflation, reinforcing rate hike predictions for 18 March. The diversified inflation horizons across EM further imply heightened competitiveness of currencies. Egypt’s CDS stands at 301bps, recording a 20bps y-t-d drop, allowing it to maintain a favourable position compared to Turkey and Ukraine, with five-year CDS of 325bps and 424bps, respectively.

Global forces to outweigh local dynamics; CBE to keep rates on hold. Global dynamics, including the USD1.9tn stimulus bill unveiled by the Biden administration and the ensuing higher market expectations for US inflation rates, triggered a surge in US T-bills that resulted in foreign portfolio outflows across EM (vs. portfolio inflows of USD31.2bn in February). Nonetheless, the inflation outlook remains on the rise; accordingly, other tools may be disposed to stimulate local activity, mainly, banks lowering three-year high yielding CDs of 11%. This is in addition to our view of the CBE’s broad monetary framework balancing liquidity circulation against FCY resources through its OMO. We see the CBE acting within the global context and keeping rates on hold in the upcoming MPC meeting, on 18 March.