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HC’s Head of Equity Research Nemat Choucri, shares her views

HC’s Head of Equity Research Nemat Choucri, shares her views about the economic sectors in Egypt

  • Tourism sector

We don’t expect a recovery in tourism before 2H21 until COVID-19 vaccinations become more available to the general public in Egypt and abroad, and accordingly we don’t expect a recovery in tourism to pre-COVID-19 levels to take place in 2021

  • Stock market

We expect a rebound in the Egyptian stock market activity in 2021 in light of the rolling out of COVID-19 vaccinations, currently prevailing low interest rates (a total of 400 bps policy rate cuts in 2020), compelling valuations, increased participation of retail investors, and the Egyptian government’s efforts and initiatives to support local industries and attract private local and foreign investments

Foreign holdings in Egyptian treasuries recovered to USD23bn in November, after it fell by USD14bn in March, when COVID-19 was announced as a pandemic, from a level of USD28bn in February. We expect Egyptian equities to also attract foreign portfolio investments in 2021 especially that the market is currently oversold (down c24% y-t-d), and foreigners were net sellers in 1Q20, 2Q20 and 3Q20

  • Foreign direct investments (FDIs)

FDIs have significant room for growth as it fell by c10% y-o-y in FY19/20 to USD7.5bn, and by c11% y-o-y in 4Q19/20 to USD1.52bn. We expect the Egyptian government’s recent efforts including lowering interest rates, the new customs law, the unified tax law and the amendments to the investment law to bear fruit and attract significant FDIs

We also expect the said efforts, in addition to the government’s recent initiatives to support local industries and an expected cut in natural gas prices to industrial users to also stimulate private local investments

Consumer spending positively affected by the declining unemployment, HC expects the CBE to keep interest rates unchanged

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled December 24th and based on Egypt’s current situation, they expect the CBE to keep interest rates unchanged.

Head of macro and financials at HC, Monette Doss commented: “We believe December inflation figures could accelerate further to 6.1% y-o-y and 0.2% m-o-m possibly correcting for November price increases resulting from supply shocks of some vegetables. However, inflation would still remain within the CBE’s target of 9% (+/- 3%) for 4Q20. We believe that declining unemployment levels to 7.3% in 3Q20 from 9.6% in the previous quarter has reflected positively on consumer spending recently. We also believe that the relative improvement in investor confidence together with monetary easing started to bear fruit as indicated by Egypt’s Purchasing Manager Index (PMI) exceeding the 50 benchmark in September, October and November, coming in at 50.4, 51.4 and 50.9, respectively. Given our December inflation forecast, real interest rate on short-term deposits and loans is estimated at c2% and c4%, respectively, significantly higher than their historical 12-year average of c-3% and c1%. On a different front, we expect foreign inflows into Egyptian treasuries to slow down over the coming months due to possible diversion of funds towards recovering emerging markets’ stocks this is beside possible outflows due to profit taking in December. Compared to other emerging markets, Egypt offers attractive real after-tax yields of 3.03% (based on 1-year T-bill rate of 13.0%, our 2021e inflation estimate of 8.0% and a tax rate of 15% applied on US and European investors). This is, for example, significantly higher than Turkey’s real yield of -1.60% (based on 1-year T-bill rate of 9.6%, Bloomberg 2021 inflation estimate of 11.2% and 0% taxes), given that Egypt tends to show a relatively better risk profile with its 5-year foreign currency CDS at 353 currently, compared to 378 for Turkey. That said, we believe the CBE has room for another 100 bps rate cut that we expect to take place in 1Q21, while we expect it to hold rates unchanged in its upcoming December meeting, since we expect markets to show muted response to an interest rate change during the holiday season.

It is worth mentioning that, in its last meeting on 12 November, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to cut rates by 50 bps for the second consecutive month after keeping them unchanged for 4 consecutive meetings since April.  Egypt’s annual headline inflation accelerated to 5.7% in November from 4.5% in the previous month, with monthly inflation increasing 0.8% compared to an increase of 1.8% m-o-m, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

HC comments on Egypt’s balance of payment (BOP): It recorded a deficit of USD3.47bn

Egypt’s balance of payment (BOP) recorded a deficit of USD3.47bn in 4Q19/20, reversing a surplus of USD0.25bn a year earlier, with the current account deficit widening to USD3.83bn in 4Q19/20 from a deficit of USD1.09bn a year earlier, data from the Central Bank of Egypt (CBE) showed. The trade balance deficit slightly widened to USD8.41bn from a deficit of USD8.29bn in 4Q18/19. Egypt’s travel receipts fell c90% y-o-y to USD0.31bn leading to a total services balance surplus of USD0.55bn, down from a surplus of USD3.28bn in 4Q19/18. Worker remittances also declined c11% y-o-y to USD6.16bn, and FDI also fell c11% y-o-y to USD1.52bn. Portfolio inflows in Egypt amounted to USD0.64bn in 4Q19/20, of which net bond inflows amounted to USD3.74bn, offsetting the outflows from the shorter-term portfolio investments, the data showed. (CBE)

HC’s comment: The impact of the coronavirus on Egypt’s external position came in largely as expected, with the exception of the trade balance deficit which came in significantly wider than our estimate of USD5.59bn, as imports of non-petroleum products remained flat y-o-y at USD13.02bn, c36% above our estimate of USD8.38bn. The services balance came in better than our estimated deficit of USD0.79bn due to lower than expected services payments. Worker remittances came in c5% above our estimate of USD5.85bn. The current account balance figure was largely in line with our estimate of USD4.25bn. FDIs came in largely in line with our estimate of USD1.03bn.