Egypt: Monetary framework monitor | Inflation trajectory to prompt monetary action
Expect 100bps hike in upcoming meeting. July’s inflation came in at 13.6% y-o-y vs. 13.2% in June, mainly on an average increase of 7.5% in petroleum products in mid-July, including diesel for the first time since 2020. We expect inflation will continue to gain traction until end-22, as the second round effect of energy price hikes transmit, and the government implements deeper monetary and fiscal reforms to secure a new IMF deal with more FX flexibility impacting prices. We see inflation to average 17% in 2H22, underpinning 100bps hike in the 18 August MPC, and a further 200bps throughout the remainder of the year.
Treasury yields need to rise further. Average yields have risen by c350bps vs. 300bps in policy rate hikes y-t-d. However, the one-year T-bill’s current yield of 16.4% implies a negative real yield, on account of our inflation expectations, lower than select Latam peers’ average of 1.6%. Yields rising further in line with expected policy actions would qualify local debt to compete for foreign flows. The CBE has been adopting a neutral liquidity stance since July through its OMO, which had an equally neutral impact on local sovereign yields.
FCY obligations to moderately ease; Not adequate breather to FX buffers. Gross debt repayments for 2H22 and 1H23 stand at USD9bn each, significantly lower than USD19bn in 1H22. This, accompanied by lower imported food prices, implies better CA dynamics in 2H22, all else constant. We calculate average CA drawdown of USD1.4bn/month in 2H22, down from USD1.9bn/month in 1Q22. We also see no portfolio outflows in 2H22 vs. USD14bn of outflows in 1Q22. Financing, nonetheless, remains crucial to rebuild FX buffers.
All eyes on a comprehensive financing package for better visibility. We calculate FCY buffers of USD23bn in Jul-22, a significant decline from USD48bn in Dec-21, implying a FCY cash cover ratio of 0.78x vs. our calculated threshold of 1x required to be restored within six months for FX stability. More sustainable levels should be reached through cUSD15bn of financing in the coming six months, to restore buffers and provide for CA needs. A possible IMF deal is seen providing clearer visibility to monetary outlook, as it incorporates all sources of financing in its assessment, backed by reforms that support external position sustainability.
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.
CI Capital leverages its full-fledged investment banking platform to provide market leading capital raising and M&A advisory, asset management, securities brokerage, custody and research. Through its subsidiary Corplease, CI Capital offers comprehensive leasing solutions, including finance and operating leases, and sale and leaseback, serving a wide range of corporate clients and SMEs. In addition, CI Capital offers microfinance lending through Egypt’s first licensed MFI, Reefy.
The Group has over 1,700 employees, led by a team of professionals who are among the most experienced in the industry, with complementary backgrounds and skill sets and a deep understanding of local market dynamics.
CI Capital has been recognized as the “Best Investment Bank in Egypt” by EMEA Finance for four years running from 2013-2016, and by Global Finance in 2014 and 2015.
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