EUR 8.53 For Business Accounts Only

Egypt: Monetary framework monitor | Managing liquidity should serve as key policy direction, not rates

Look for continued absorption to manage ST price levels. The CBE’s net absorption of EGP163bn in Oct-21 (via Corridor Linked Deposits [CLD], the main OMO tool) marks the highest since Jan-21, as excess liquidity exceeds EGP700bn for the first time since Feb-20. Total FCY buffers rose to USD51bn in September from USD48.9bn in August, mainly on a USD3bn Eurobond issuance. The FCY cash cover increased to 0.92x in September from 0.88x in August and vs. our calculated threshold of 1x required for FX stability. With volatile global dynamics and no consensus on the maturity of the inflationary cycle, we see continued absorption through OMO as an optimal short-term action. We expect the CBE to keep policy rates unchanged in the 28 October MPC, on slow transmission of interest rate tools (4-6 quarters) and given limited visibility of how protracted imported energy and food price inflation will prove to be.

Expect yields to rise. We expect yields to gradually pick up by 50bps by end-2021, as a result of a more active liquidity management witnessed in the recent CLD auction. Average T-bill yields stand at 12.74%, as of 20 October, a marginal change m-o-m (-15bps y-t-d, -122bps from Feb-20 vs. 400bps of total cuts in 2020). Egypt continues to outperform EM peers, with a high spot real yield of 6.51% vs. an average of 1.3% (excluding outliers). Meanwhile, Egypt’s 5Y CDS stands at 450bps (+88 m-o-m), in line with the upward trend witnessed across EM in October.

Pick-up in tourism to partially offset potentially lower carry trade appetite. Foreign portfolio inflows in local debt (key source of external funding) reached USD23bn in FY20/21. Potential passive flows of USD4bn upon inclusion in the JP Morgan GBI-EM index in Jan-22 are likely to be offset by a lower active appetite, on potential Fed tapering and global tightening. However, we see tourism revenues doubling in 2022, leading to a current account deficit of USD8-10bn vs. USD18bn in FY20/21, lowering the funding gap. The BOP funding gap should mainly be covered by new debt (and rolling over of a USD2.5bn Eurobond maturing in Jan-22, bringing total issuances to cUSD11bn), while maintaining a downtrend in debt/GDP to 33% in 2022e from the current 34%, amounting to USD147bn.

See no short-term currency pressures. We expect Oct-21 inflation to rise above 1.5% m-o-m, while remaining below 7% y-o-y (CBE’s mid target). This should bring inflation to c7% by year-end. We maintain a stable FX outlook over the short-term, supported by: i) contained inflation, ii) tapping new debt, and iii) liquidity absorption. Currency stability over the next six months is essential, in our view, to avoid hot money outflows, as it has a limited current account benefit (overhang on tourism is a result of the pandemic and not depreciation).