EUR 8.53 For Business Accounts Only

Egypt: Monetary framework monitor | Liquidity balances, on improving external position

Healthy cash cover, on recovering external position dynamics; Expect CBE to maintain rates in upcoming MPC meeting. The CBE’s liquidity management was largely neutral in May and June m-t-d (net injections of EGP32bn vs. absorption of EGP45bn in April alone) through its main OMO tool, the Corridor Linked Deposits (CLD). This indicated a lower need for elevation of yields to maintain attractiveness of local debt to the foreign market. This comes in line with our projections of balanced M2 growth to maintain a sustainable cash cover ratio (currently at 1.11x), and FCY stability (foreign currency buffers above 9x import coverage). We look for the CBE to maintain rates in the upcoming meeting, on 17 June, with a potential pickup in inflation and global dynamics not supportive of lower interest rates.

BOP revenues outpace consensus expectations, positive for FCY. Average T-bill yields currently stand at 13.31%, as of 10 June, down c100bps from pre-pandemic levels (Feb-20), and stable m-o-m. This compares to 400bps of total cuts throughout 2020. While divergence between rate cuts and yield movements still hold, external position developments are positive. Remittances increased 8.5% y-o-y to USD23.4bn in 9M20/21; average 5M21 tourism figures indicate 40% recovery of pre-pandemic levels. Foreign holdings in the local debt market remain within peak levels reached in Feb-21, amounting to USD28-29bn, as of end-May.

EGP carry trade affirms competitiveness relative to EM. Egypt continues to outperform EM peers, offering a spot real yield of 8.53% vs. 1.32% and 2.33% for Turkey and Ukraine, respectively, and an average of 0.14% across EM. In contrast to Egypt, Turkey’s inflation figures remain high, at 16.59% y-o-y, as of May. The diversified inflation outlook across EM further implies the heightened competitiveness of markets. Egypt’s CDS remain relatively stable at 325bps, allowing it to maintain a favourable position compared to Turkey and Ukraine, with five-year CDS of 377bps and 380bps, respectively.

Inflation trending up in 2H21e, stable currency. We see rising inflation in 3Q21, on the ‘commodity super cycle’, with y-o-y inflation ending the year close to the mid-target of 7%. We also reiterate that new sources of FCY should support the stability of the EGP, including the JPMorgan EM bond index inclusion expected in 4Q21, which should generate USD3-4bn worth of foreign flows vs. a total external funding gap of USD6bn in 2H21e. Inclusion in the FTSE Russell Frontier Markets Government Bond Index is a further upside. Our model accounts for USD3-4bn of international issuances in 3Q21 to maintain currency stability, possibly in the form of international sukuk, as announced by the Ministry of Finance.