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.
CI Capital is a diversified financial services group and Egypt’s leading provider of leasing, microfinance, and investment banking products and services.
Through its headquarters in Cairo and presence in New York and Dubai, CI Capital offers a wide range of financial solutions to a diversified client base that include global and regional institutions and family offices, large corporates, SMEs, and high net worth and individual investors.
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