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

Posted on by Marwa Nakhla

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 believes the MPC is to keep the policy rates unchanged

Posted on by Marwa Nakhla

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

Financials analyst and economist at HC, Heba Monir commented: “ We anticipate Egypt’s inflation to continue rising by 1.8% m-o-m and accelerate to 37.8% y-o-y in September, reflecting supply shortages of basic commodities and products mainly caused by the curbing of importation and lack of USD availability and the seasonality effect of the partial start of schools and universities’ academic year. Egypt’s overall balance of payment (BoP) recorded a deficit of USD317m in 3Q22/23, despite recording surpluses during the previous two quarters, mainly due to a c17% q-o-q drop in exports. Moreover, Egypt’s 1-year CDS soared c60% y-t-d and c31% m-o-m to 1,217 bps in mid-September 2023. On a more positive note, net international reserves (NIR) increased by 4.39% y-o-y and 0.14% m-o-m to USD34.9bn in August, and deposits not included in the official reserves increased by c1.6% m-o-m and 5.35x y-o-y to USD4.74bn in August. Egypt’s banking sector’s net foreign liabilities (NFL) narrowed by USD822m m-o-m to USD26.3bn in July, according to CBE data. Excluding the CBE, the banking sector’s NFL narrowed by USD965m m-o-m to USD16.1bn, due to an increase in banks’ foreign assets (excluding the CBE) by c8% m-o-m versus no change in banks’ foreign liabilities. Based on Egypt’s economic situation, we believe that the MPC is likely to maintain interest rates at its 21 September meeting to fully absorb the effect of the last 100 bps increase, especially that the inflation is supply-driven and not demand-driven. Additionally, the latest 12-month T-bills recorded an average yield of 25.541%, up 663 bps y-t-d and 83 bps m-o-m, partially reflecting the 3 August 100 bps rate hike, the spike in Egypt’s CDS and to maintain the attractiveness of Egypt’s carry trade, which also suggests that the MPC may hold interest rates at its upcoming meeting.”

It is worth mentioning that, in its 3 August meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to raise the benchmark overnight deposit and lending rates by 100 bps to 19.25% and 20.25%, respectively, with 300 bps total rate hike y-t-d and 800 bps in 2022. Egypt’s annual headline inflation accelerated for the third consecutive month to a record of 37.4% in August from its previous record of 36.4% y-o-y in July, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 1.59% m-o-m in August compared to 1.86%m-o-m 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 an expectation to maintain rates in its meeting next week, according to Reuters poll.

HC expects the CBE to increase interest rates by 0.5-0.75 bps

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled March 24th and based on Egypt’s current situation, they expect the CBE to increase interest rates by 0.5-0.75 bps

Head of macro and financials at HC, Monette Doss commented: “We raise our 2022e inflation estimate to 11.5% from 7.2% previously on increasing international prices of wheat and oil and our expectation of less importation of consumer goods that could lead to some supply shortages. Our calculations are based on Bloomberg 2022 consensus wheat price estimate of USD1,086/bushel, c53% higher than its 2021 average price of USD712/bushel and consensus Brent price estimate of USD91.7/barrel, c55/% above its 2021 average of USD59/barrel. We also expect new regulations requiring letters of credit (LCs) for most imported goods to ultimately result in less importation of consumer goods, possibly leading to some supply shortages and imposing some inflationary pressures. On a different front, our calculations suggest that carry-trade currently requires a 12M T-bill rate of 14.8% (162 bps higher than the latest auction) based on; (1) Egypt’s current 1-year USD credit default swap of 560 bps, (2) Bloomberg 2022 consensus estimate for the Federal Reserve rate at 1.55%, and (3) Egypt-USA 2022 inflation differential of 544 bps (given our Egypt 2022e inflation estimate of 11.5% and Bloomberg USA 2022 inflation estimate of 6.1%). We believe that carry trade is key at the moment to support Egypt’s net international reserves (NIR), more so with the banking sector’s net foreign liability (NFL) position widening to USD11.5bn in January and possibly worsening further as net foreign portfolio outflows reached USD2.3bn since the beginning of the Russia-Ukraine war. That said, we expect the MPC to increase interest rates by 0.5-0.75 bps in its upcoming meeting.”

It is worth mentioning that, in its last meeting on 3 February, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the tenth consecutive time. Egypt’s annual headline inflation came in at 8.8% in February, with monthly inflation increasing 1.6% m-o-m, compared to an increase of 0.9% m-o-m in January, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).