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Egypt: Monetary framework monitor | Inflation and FCY dynamics support interest rate stability

Expect the CBE to maintain policy rates in the 3 February MPC. The CBE’s net absorption of EGP86bn in Jan-22 (via Corridor Linked Deposits, the main OMO tool) is comparable with EGP84bn in Dec-21. In Dec-21, foreign portfolio outflows recorded USD2bn, as per market intelligence, triggered by year-end profit taking. However, we estimate that FCY buffers reached USD52.7bn in Dec-21 (up from USD50.5bn in Oct-21e), on a USD3bn Islamic-green loan, implying a slightly higher FCY cash cover ratio of 0.91x (vs. 0.88x in Nov-21) vs. our calculated threshold of 1x needed for FX stability. Liquidity management should continue in the short-term, in our view, restoring FCY buffers and mitigating EGP weakness.

Inflation to remain within target, despite global price pressures. We see Jan-22 inflation rising to c7% y-o-y (CBE’s mid target) vs. 5.9% in Dec-21, on a low base effect and higher food items. The quarterly indexation for petroleum prices is due starting Feb-22, and with crude prices flirting around the USD90/bbl mark vs. USD83/bbl in Oct-21 (last revision), we expect the committee will opt to hike prices by EGP0.25/litre for petroleum products. This would put February-April 2022 inflation at an average of 7.8% y-o-y (7.3% without a petroleum price hike), while we maintain our estimate for 2022 at 7.5%.

Largely stable real yields confirm attractive carry trade. Average T-bill yields stand at 12.39%, as of 25 Jan-22, -10bps m-o-m, and -53bps y-o-y (of a total of -140bps from Feb-20 vs. 400bps of total cuts in 2020). Egypt continues to outperform peers, with a high spot real yield of 7.2% vs. an EM average of 1.8% (excl. outliers), offering the highest inflation-adjusted rate of 2.85%, followed by Indonesia.

Jan-21 holds a different FCY flow dynamic; Net positive impact. We expect a repayment of USD2.5bn due on 31 Jan- to be offset by passive inflows of USD4bn, upon inclusion in the JP Morgan GBI-EM index (EMBI) end of Jan-22 (funds to reflect in Feb-22). This comes in addition to the USD970mn of FCY portfolio inflows announced by policymakers in first two weeks of Jan-22 (possibly a reversal of year-end profit taking trend and active portfolio buying ahead of Egypt’s expected inclusion in EMBI). Hence, we maintain our view of a largely stable FX outlook over the short-term, with EGP weakness limited to 3-5% in 2022.