EUR 23.87 For Business Accounts Only

Expect a pause to rate hikes, a breather to activity

CBE to hold rates temporarily, as inflation momentum stabilises. We see local food inflation to continue easing in June, as per market intel, after it decelerated in May (1.1% vs. 3.3% in April). We expect annual inflation in 2H22 to peak in August above c15%. Although we see up to 200bps hikes until end-2022 to maintain positive real yields, we anticipate the CBE to keep rates on hold in its upcoming meeting on 23 June. A pause to the hikes aims to strike a balance between curbing inflation and providing a breather to business activity, in our view. This is further backed by the CBE announcing tolerance to deviation from inflation target in the coming period.

OMO to complement previous policy hikes through liquidity absorption. The CBE’s net absorption of EGP50bn in Jun-22 to date (via Corridor Linked Deposits [CLD], the main OMO tool), continues May’s trend of EGP90bn absorption. In the short-term, we look for liquidity management to linger as it has a dual benefit of absorbing local liquidity to contain inflation and decelerating M2 growth vs. FCY buffers, hence restoring FCY cash cover ratio. We expect current CLD auctions to remain within the corridor range, undistorted by treasury yields.

Yield level to conform to liquidity and monetary tightening; eye further rise. Average yields increased by c200bps vs. 300bps since the beginning of the year. The current average levels of 14.5% provide a marginal positive real yield of c1% and a net-of-tax negative yield. Peers in Asia and Latam (including Indonesia, Brazil, and Mexico), where inflation rates are largely contained, offer higher real yields above 1%. We see average yields aligning further, fully reflecting the hikes. Local debt yield level attractiveness is gradually restoring, but fund flows will remain subject to improvement to local outlook and global appetite, in our view.

Await IMF deal announcement for better visibility on external financing. We calculate FCY buffers of USD28bn in May-22 (vs. USD48bn in Dec-21), implying a FCY cash cover ratio of 0.68x (vs. 0.82x in Dec-21) vs. our calculated threshold of 1x required to be restored within six months for FX stability. More sustainable levels should be reached through cUSD17bn of financing until Dec-22 (to restore buffers and provide for current account needs). The IMF deal (expected in July) is seen providing clearer visibility to FCY sources and EGP outlook, as it incorporates all sources of financing in its assessment, including GCC pledged investments.