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HC expects the MPC to hold rates at its 21 December meeting

HC expects the MPC to hold rates at its 21 December meeting

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled December 21st. Based on Egypt’s current situation, they expect the CBE to keep the policy rates unchanged.

MPCFinancials analyst and economist at HC, Heba Monir commented: “ We reduced our expectation for Egypt’s inflation, given the recent deceleration over the past two consecutive months, estimating urban inflation to rise by 1.9% m-o-m and 34.4% y-o-y in December, reflecting supply shortages of essential commodities and products mainly caused by the curbing of importation, exporting some crops and the USD shortage. The Egyptian government downward revised its real GDP growth forecast for FY23/24 to 3.5% from an earlier forecast of 4.2%, according to the minister of planning, lower than our forecast of 4.0%. According to data from the Central Bank of Egypt, Egypt’s banking sector’s net foreign liabilities (NFL) widened by USD340m m-o-m in October to USD27.2bn. Excluding the CBE, the banking sector’s NFL narrowed by USD482m m-o-m to USD15.9bn. The increase in NFL was mainly due to a widening in the CBE’s NFL by USD823m m-o-m to USD11.3bn, possibly related to Egypt’s external debt repayment. Also, based on our calculations, the gap between the parallel and official FX rates widened to as much as c60% and to c30% between the Real Exchange Rate (RER) and Real Effective Exchange Rate (REER) models. On a more positive note, net international reserves (NIR) increased by c4.9% y-o-y and 0.20% m-o-m to USD35.2bn in November, and deposits not included in the official reserves increased by c11.8% m-o-m and 3.71x y-o-y to USD6.18bn in November. Also, Egypt’s 1-year CDS dropped to 870 bps from its peak at 1,577 bps in the last MPC’s meeting, which translates into an average pre-tax required rate of return by investors of 27.9%, based on our calculations, derived by assigning a 15% weight to the required return by foreign investors and 85% weight to the required return by banks. The 27.9% required return implies a positive real interest rate of 0.11%, assuming an average 12M inflation rate of 23.6% and a 15% tax imposed on US and European investors treasury holdings versus a current negative real interest rate of 0.50% based on the latest 12M T-bills rate of 27.2%. Recently, the Egyptian government resumed talks with the International Monetary Fund (IMF) regarding completing the first and second reviews of its USD3.0bn Extended Fund Facility (EFF) and additional financing, which is crucial to ensuring the implementation of the policy package, according to the director of the IMF’s Communications Department. On the global front, the inflationary pressures had eased due to major economies’ monetary tightening and favorable base effects. Therefore, based on the recent deceleration of supply-driven inflation, the high likelihood that the Federal Reserve would maintain interest rates at its meeting today, and the improvement in Egypt’s CDS, we expect the MPC to hold rates at its 21 December meeting. We don’t rule out the possibility of a policy rate hike in the case of a movement in the FX rate; however, we see it as unlikely in the coming MPC meeting.”

It is worth mentioning that, in its 2 November meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) maintained the benchmark overnight deposit and lending at 19.25% and 20.25%, respectively, after it increased it by 300 bps y-t-d and 800 bps in 2022. Egypt’s annual headline inflation decelerated to 34.6% in November from 35.8% y-o-y in October, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 1.3% m-o-m in November compared to a 1.0% m-o-m increase in the previous month. On the global front, the US Federal Reserve raised interest rates in July by 25 bps to a range of 5.25-5.50%, a total of 100 bps y-t-d and 425 bps in 2022, with most expectations likely to maintain rates in its meeting today, according to expectations.

About HC Securities & Investment

HC Securities & Investment is a leading investment bank in Egypt and the MENA region. Since its inception in 1996, HC has utilized its relationship-driven insights, local and regional market knowledge, and industry-specific expertise and strong execution capabilities to provide its clients with a wide range of services in investment banking, asset management, securities brokerage, research, custody and online trading  through its offices in Egypt and the UAE (DIFC). HC Investment Banking has an outstanding track record of advising leading corporates in Egypt and the MENA region on M&A, capital market, and financing transactions in excess of USD6.6bn. HC Asset Management now manages 7 mutual funds for commercial banks and portfolios for institutions and sovereign wealth funds with assets under management in excess of EGP7bn. HC Brokerage is ranked among the top brokers in Egypt and provides a wide array of services, including research and online trading to institutional and retail clients.


HC: Egypt macro, FX shortage weighs on economic growth

Egypt macro

FX shortage weighs on economic growth

  • Low FX liquidity is fueling soaring inflation and affecting GDP growth, in our view. We expect an FX adjustment when Egypt improves its FX supply

  • We see the current account deficit turning into a surplus with a moderate expansion in external debt over FY23/24e, impacted by recent rating downgrades by Moody’s, S&P, and Fitch

  • We expect the budget deficit to widen to 7.1% of GDP in FY23/24e on higher interest expense and social benefits 

HC shared their outlook recently about Egypt’s macro economy in 2024 addressing the main GDP growth drivers and expectations on the EGP, Inflation rates and the state general budget.

Economist and financial analyst at HC, Heba Monir commented: “ FX shortage and monetary tightening constraining GDP growth, in our view: Egypt’s real GDP growth decelerated to 3.8% in FY22/23, and we expect it to increase to 4.0% in FY23/24e, slightly lower than the government’s target of 4.1%, yet higher than the IMF’s October 2023 estimate of 3.7%. However, lower-than-expected tourism revenue by c15% y-o-y due to the Israeli-Hamas war could lower our GDP growth estimate for FY23/24e to 3.3% and narrow the overall balance of payments (BoP) surplus by c50%. Our estimates reflect an EGP devaluation of c37% y-o-y in FY22/23 and of c19% y-o-y in FY23/24e, based on our real effective exchange rate (REER) model, compared to a c6% y-o-y EGP devaluation in FY21/22. The EGP devaluation, mainly triggered by foreign portfolio outflows following the outbreak of the Russian-Ukrainian war, fueled inflationary pressures and negatively affected corporate borrowing and private consumption. We expect GDP growth in FY22/23e to be driven by higher private consumption (+5.9% y-o-y), higher FDIs (+28.4% y-o-y), and a narrowing trade deficit, while in FY23/24e, besides the improved trade deficit, we expect a rebound in public investments (+47.8% y-o-y) to drive GDP growth, despite lower government consumption (-2.90% y-o-y).

Monir continued: “ We expect inflationary pressure to persist in FY23/24e, reflecting the EGP devaluation: We expect inflation to accelerate to an average 33.2% y-o-y in FY23/24e, from 24.1% in FY22/23 and 8.48% y-o-y in FY21/22 as we expect inflationary pressures to persist following Russia’s withdrawal from the Black Sea Grain Initiative, supply shortages, weakening EGP, higher oil prices, and the impact of El Niño on commodities’ prices. We expect inflation to decline gradually on base effect to 26.1% by June 2024. To control inflation and anchor inflation expectations, the Central Bank of Egypt (CBE) increased policy rates by 1,100 bps since FY21/22, and we expect it to leave rates unchanged at its 21 December meeting since inflation is supply-driven. In 2024e, we expect an improvement in the government’s partial asset sale program, tourism, Suez Canal, and Egypt’s worker remittances to possibly trigger the start of monetary easing, which would lead to a higher GDP growth in FY24/25e, on our numbers. The Egyptian government recently secured USD2.63bn from selling public stakes in companies in July and September and is on track to sell public stakes and assets worth more than USD2bn by the end of June 2024.

The BOP reversed into a surplus of USD882m in FY22/23, which we project to narrow to USD529m in FY23/24e on lower borrowing by banks: Egypt’s balance of payments (BOP) recorded an overall surplus of USD882m in FY22/23, reversing a deficit of USD10.5bn a year earlier, mainly due to a significant narrowing in the current account deficit on lower imports and improved tourism and Suez Canal revenues. For the same reasons, we expect the BOP to record an overall surplus of USD529m in FY23/24e. We anticipate the current account deficit to turn into a surplus of USD1.31bn in FY23/24e (c0.4% of GDP), from a deficit of USD4.71bn in FY22/23, versus the IMF’s deficit estimate of USD8.63bn (2.41% of GDP), on a lower trade deficit, in our view. Regarding Egypt’s external debt, which reached USD165bn by the end of June 2023, we estimate that the government repaid around USD33.9bn in FY22/23 and rolled over some USD24.0bn (mostly GCC deposits), representing c41% of its total dues for FY22/23 with a scheduled repayment of USD24.7bn in FY23/24e. We forecast a moderate increase in FY23/24e’s external debt, constrained by debt capacity and the recent rating downgrades by Moody’s, S&P, and Fitch, leading Egypt to resort to Asian markets to issue Panda and Samurai bonds with a value of around USD979m and considering tapping the Indian market. We forecast the financial account surplus to narrow by c13% y-o-y to USD7.82bn in FY23/24e with a net inflow in Egypt’s portfolio investment of USD0.18bn versus an outflow of USD3.77bn in FY22/23. The banking sector’s net foreign liabilities (NFL), including the CBE, widened c36% y-o-y to USD27.1bn as of June 2023. We estimate it to narrow by c6% y-o-y to USD25.5bn by June 2024, on an improvement in foreign currency inflows, including proceeds from the government’s partial asset sale program and improving FDIs in the services sector, especially in real estate, finance, and information technology. Following the delay in the IMF program review of March and September, related to the USD3.0bn Extended Fund Facility (EFF) Egypt secured in December 2022, Egypt’s 1-year CDS fluctuated over the 11M23, reaching 1,122 bps currently from 499 bps in January, after it resumed its partial asset sale program. In our view, Egypt’s commitment to the IMF’s reforms, most importantly leveling the playing field with the private sector, is essential to attract FDIs again and restore FX liquidity.” Monir added.

Heba Monir concluded: “ We estimate the budget deficit to widen to 7.1% of GDP in FY23/24e mainly on higher interest expense: Egypt’s budget deficit reached 6.1% of GDP in FY22/23, similar to FY21/22’s level, while we estimate it to widen to 7.1% of GDP in FY23/24e, reflecting a cash deficit of EGP810bn, c5% lower than the government estimate of EGP849bn. Our FY23/24e budget estimates assume c54% y-o-y higher total revenues of EGP2.13trn, in line with the government’s estimate (-1%), on a c25% y-o-y higher tax revenue and a 2.87x y-o-y hike in non-tax revenue. We expect expenditures to increase c44% y-o-y to EGP2.94trn, c2% lower than the government’s estimate. We forecast interest expense to increase by c29% y-o-y to EGP757bn in FY22/23e and by c55% y-o-y to EGP1.17trn in FY23/24e, representing c37% and c40% of total expenditures in FY22/23e and FY23/24e, respectively, higher than its 5-year historical average of c36%, mainly due to the 1,100 bps increase in key policy rates since the start of 2022.