EUR 22.34 For Business Accounts Only

Egypt: Monetary framework monitor | Tourism recovery to provide FCY stability

Higher FCY revenues support liquidity expansion; Expect no change in rates. The CBE’s net absorption of EGP58bn in July vs. an injection of EGP24bn in June (through OMO tool, the Corridor Linked Deposits [CLD]), reflects elevated yields, to maintain local debt attractiveness to the foreign market. This comes in line with our projection of M2 growth balancing the FCY cash cover ratio (currently at 1.1x) and restoring FCY buffers (9x import coverage). Higher foreign currency resources (mainly on a recovery in tourism) should allow for higher M2 growth, while maintaining FCY stability. We expect the CBE to maintain rates in the upcoming meeting, on 5 August, on a potential pickup in inflation and global dynamics that would not support lower interest rates or yields.

Return of Russian tourism boosts BOP dynamics. Average T-bill yields currently stand at 13.22%, as of 29 July, down 105bps from Feb-20, and -10bps m-o-m. This compares to 400bps of total cuts throughout 2020. While yields remain elevated, external position developments are positive. Tourism revenues increased to USD3.5-4bn in 1H21 from USD2.6bn in 1H20 (vs. a high of USD12bn in FY18/19). On 8 July, Russia announced lifting the ban on direct flights to Red Sea resort cities imposed in 2015. We estimate this step will bring in cUSD3.5bn in annual revenues (c30% of funding gap), on 3mn annual Russian visitors.

EGP carry trade affirms competitiveness relative to EM. Egypt continues to outperform EM peers, offering a spot real yield of 8.41% vs. 2.33% for its closest competitor, Ukraine, and an average of 2.17% across EM (excluding outliers). Average y-o-y inflation across EM stood at 8.48% in June vs. 4.90% for Egypt. EMs' divergent inflation outlook further highlights Egypt’s competitiveness; naturally lower inflation countries will be able to weather price shocks better. Although Egypt’s CDS increased 55bps m-o-m to 373bps (on regional dynamics), it maintains a favourable position vs. peers like Turkey and Ukraine, with five-year CDS of 381bps and 423bps, respectively.

Petroleum price hikes narrowly impact inflation, yet we maintain our view on higher inflation in 2H21. While the prices of Octane 95, 92, and 80 rose 25 piastres, diesel remained unchanged for 3Q21, leading us to expect the price increase will have limited broad-based inflationary impact. Diesel is the main fuel used in logistics and transportation of goods, impacting service rates, and passed onto a wide range of products, including food and beverages (30% of CPI). We estimate inflation between 5.1-5.5% for July and an average of 6% for 2H21, on the back of the commodities rally, coupled with the restocking of food reserves. As such, we expect rates to remain stable until year-end.