EUR 8.57 For Business Accounts Only

Egypt: Monetary framework monitor | Look for foreign issuance to restore stability

FCY cash cover drops below threshold on debt repayments. The CBE’s net absorption of EGP58bn in July and EGP26bn in August (through OMO tool, the Corridor Linked Deposits [CLD]) came in response to the drawdown on foreign buffers, to repay financial obligations (cUSD0.5-1bn Paris Club instalment, USD2bn loan, possibly USD3bn of Gulf deposits). This reduced the FCY cash cover to 0.95x from 1.1x in June and vs. our calculated threshold of 1x required for FX stability. We expect absorption to linger until a foreign issuance of USD3-4bn (required amount to restore the FCY cash cover). In the meantime, any stronger-than-expected pickup in tourism would be a further support to foreign currency sources.

Yields significantly drop, providing buffer if US starts tapering. Average T-bill yields stand at 12.79%, as of 9 September, down 43bps m-o-m (of a total of 148bps from Feb-20 vs. 400bps of total cuts in 2020). While yields remain elevated, we attribute the drop to USD2-3bn of foreign inflows into local debt during August. Lower debt yields were accompanied by a c20bps lower m-o-m CLD yield. Declined yields are aligned with policy rates, leading to the growth target initially set by lowering policy rates. Further alignment provides monetary flexibility to move rates if the US starts narrowing and global yields rise.

EGP carry trade affirms competitiveness relative to EM. Despite the reduced yields in August, Egypt continues to outperform EM peers, offering a spot real yield of 7.61% vs. an average of 1.7% across EM (excluding outliers). Average y-o-y inflation across EM detailed 7.56% in August vs. 5.6% for Egypt. Egypt’s low base inflation vs. peers provides a breather to the economy (no need to tighten monetary policy), better weathering price shocks. Although Egypt’s CDS stands at c354bps, it maintains a favourable position vs. peers, such as Turkey and Ukraine, with five-year CDS of 368bps and 393bps, respectively.

Inflation accelerates to 5.7% y-o-y in August, in line with our view; Expect no change in policy rates. Driven by a 6.6% y-o-y rise in food and non-alcoholic beverage prices, followed by a 4% y-o-y increase in housing, water, electricity, gas, and other fuels, inflation accelerated to its highest level since Nov-20, reflecting the commodities rally and the restocking of food reserves. Despite this, it remains below the lower bound of the CBE’s inflation target of 7%+/-2% for 4Q22. As such, we expect the CBE to maintain rates during the meeting on 16 September, on inflation rising to c6% in 2H21and the need to maintain an attractive carry trade.