EUR 22.06 For Business Accounts Only

Egypt macro | Monetary framework monitor

CBE eases liquidity momentum, restores FCY coverage, in line with our view. M2 grew by 1.2% m-o-m in Aug-20, decelerating from the Jul-20 1.9% m-o-m growth figure, in line with our expectation. Sep-20 to date, the CBE has been absorbing liquidity (on a net basis) through its main OMO tool, the CLD, despite cutting policy rates by 50bps on 24 September. This comes in line with our forecast of a deceleration in M2 growth to an average monthly figure of 1.5% over the coming months, which is key to maintaining a sustainable FCY cash cover ratio. We note that Aug-20 money supply growth brings 3Q20 average monthly growth to 1.7% vs. an average of 2.1% in 2Q20. The hike in Sep-20 NIR and deposits outside reserves, by a total of USD1.9bn, puts the FCY cash cover ratio at 1.0 (vs. 0.97 in Aug-20), as per our calculations, indicating easing pressure on Egypt’s FCY position, and further supporting our view of a stable currency until year-end.

Yields did not fully price in the latest policy rate cut. Average T-bill yields currently stand at 13.33%, down 25bps since the CBE’s 50bps rate cut in September (-1.49% y-t-d). As expected, the CBE absorbed EGP71bn (net) through its OMO, during the period from 23 September to 7 October. Additionally, average T-bond yields (3Y and 7Y) currently stand at 14.43%, down 15bps over the past three weeks, and 72bps y-t-d.

EGP carry trade remains favourable relative to EM. Egypt’s risk metrics have improved vs. EM peers, as its risk-adjusted return currently stands at 9.05% vs. 6.79% for Turkey and 4.72% for Ukraine. The rise in Turkey’s risk-adjusted return comes following the recent 2% hike in its benchmark interest rates, reaching 10.25%. Furthermore, Egypt’s real rate stands at 9.74%, compared to 0.29% and 8.17% for Turkey and Ukraine, respectively. We expect inflation to accelerate in 4Q20, and rise to 6.5% in 2021, on gradual restoration of activity, and in line with the current growth momentum in money supply.

Foreign portfolio flows continue to pick up, largely restoring FCY buffers. Foreign portfolio inflows from Jun-20 to date are estimated at USD8-9bn, reversing c70% of total outflows, initially triggered by the pandemic. We look for inflows momentum to decelerate in 4Q20, on the back of the possible implications of the second wave of COVID-19, and due to the end of year effect. That said, we expect FDIs and portfolio flows to cover 90% of the current account deficit in 4Q20e. Foreign currency buffers currently stand at USD42bn (7.4x import coverage), providing a safety net against adverse outflows.