HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled March 30th. Based on Egypt’s current situation, they expect the CBE to increase the policy rates.
Financials analyst and economist at HC, Heba Monir commented: “ We expect the MPC to continue tightening policy rates by around 200 bps in its 30 March meeting to tame increasing inflation rates, which we expect to continue rising, peaking at 35.9% by July, on our numbers, before it decelerates to 30.3% by December. We anticipate that March and the coming months’ inflation figures will reflect; (1) the early March c7-11% increase in octane gasoline prices and the c20% increase in heavy fuel oil (mazut) prices for all industries except food and electricity generating sectors; (2) the expected increase in household electricity effective 1 July; (3) the recent liberalization of the prices of essential food commodities like rice; (4) the shortage in local poultry supply due to problems related with animal feed prices and availability, affected by the Russia-Ukraine war, and (5) the continuing EGP devaluation which reached c20% y-t-d. As a result of the USD shortage, Egypt’s banking sector net foreign liabilities (NFL), including the Central Bank of Egypt (CBE), widened to USD21.6bn in January 2023 from USD20.0bn in December 2022. Excluding the CBE, the banking sector’s NFL widened to USD13.0bn from USD11.7bn in December 2022. In light of the inflationary pressures, the USD shortage, and Egypt’s need to keep the carry trade attractive, we calculate a required 12M T-bills rate of 25.18%, which considers soaring Egypt’s 1-Year CDS to 1,419 from 670 at the beginning of February. Foreign holdings in Egyptian T-bills increased by USD2.4bn from December 2022 to USD10.4bn by the end of January 2023. The latest 12M T-bills auction recorded an average yield of 19.19% (accounting for a 15% tax rate for US and European investors), which offers a real yield of negative 2.31%, given our inflation expectation of 21.5% in March 2024, solidifying our view of a needed increase in policy rates. We estimate the real yield to turn to a positive1.33% based on our calculated required after-tax 12M T-bill rate and expected inflation of 20.1% for April 2024.
On a more positive note, deposits not included in the official reserves increased for the third consecutive month, increasing in February by c19% m-o-m to USD2.61bn, yet it still remains below its level of USD9.18bn a year earlier, and net international reserves (NIR) inched up for the sixth consecutive month by 0.4% m-o-m to USD34.3bn in February, while dropping 16.2% y-o-y.”
It is worth mentioning that, in its 2 February 2023 meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to keep the benchmark overnight deposit and lending rates unchanged at 16.25% and 17.25%, respectively after it hiked policy rates by 800 bps in 2022 and by 500 bps in 4Q22 alone. Egypt’s annual headline inflation accelerated to 31.9% y-o-y in February from 25.8% y-o-y in the previous month, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 6.5% m-o-m in February 2023 compared to an increase of 4.7% m-o-m in the previous month, mainly due to increasing food and beverage prices by 14.4% m-o-m compared to an increase of 10.1% m-o-m in January. On the global front, the US Federal Reserve raised interest rates on Wednesday by 25 bps, bringing its total rate hikes y-t-d to 50 bps after it increased interest rates by 425 bps in 2022.
HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled June 23rd 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: “The May inflation figure came in lower than our estimate of 14.0% y-o-y, and we expect it to average 14.4% over the rest of the year, however, well above the CBE’s inflation target of 7% (+/-2% for 4Q22). We believe inflation is largely imported and reflects some product shortages due to less domestic manufacturing and lower importation. Egypt’s PMI came in at 47.0 in May, with the data pointing to low consumer spending, falling new order volumes at the quickest pace since 2020, and reduced business input purchases and staffing. We believe that consumer and business spending is largely subdued, with much of the liquidity directed to high-yield banking deposits. As of April 2022, local currency deposits increased to c66% of GDP from the pre-pandemic level of c49% in April 2019. However, domestic credit to the private business sector remained subdued at c20% of GDP in April 2022, slightly up from c16% in April 2019, and below its pre-revolution level of c26% in April 2010. Given the current economic dynamics, we believe that further interest rate hikes will not prove effective in combating inflation and could prove self-defeating by suppressing business activity, leading to more supply shortages. We still believe that carry trade is essential for supporting Egypt’s net international reserves (NIR) given its recent decline to USD35.5bn in May from USD40.9bn in February, the drop in foreign currency deposits not included in official reserves to USD1.04bn in May from USD9.2bn in February, and the widening net foreign liability position of the banking sector to USD12.7bn in April from USD3.29bn in February. However, an overvalued EGP, as indicated by the JP Morgan real effective exchange rate index at 108 bps, the change in outlook on the Egyptian economy to negative from stable by Moody’s, the emerging markets sell-off , and subdued increase in 12M T-bills are hindering carry-trade and diluting the benefit of an interest rate hike, in our view. We note that the yield on 12M T-bills increased by only 90 bps following the 300 bps policy rate hikes, while the yield on 3M T-bills increased by 370 bps. This resulted in low coverage of the longer-term T-bill auctions, reducing the weighted average duration of issued T-bills from 22 March to 16 June to 5.5 months, from 9.8 months (from 1 January to 15 March). Given Egypt’s current 1-year USD credit default swap at 808 bps, and given the Egypt-US inflation differential, we believe interest on 12M T-bill rates should increase to the north of 16.0% to reflect the 300 bps rate hike undertaken so far, to translate to a real interest of 0.27% from -1.73% currently, before resorting to hiking rates further. That said, we expect the MPC to keep rates unchanged in its upcoming meeting.”
It is worth mentioning that, in its last meeting on 19 May, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to increase key policy rates by 200 bps after increasing it by 100 bps in March and following the Federal Reserve Bank’s (Fed) decisions to increase the interest rate by 25 bps in March and by 50 bps in May. The Fed also said that it is likely to increase interest rate by 50-75 bps in its next meeting in July. Egypt’s annual headline inflation accelerated to 13.5% in May from 13.1% in the previous month, with monthly inflation increasing 1.1% m-o-m, compared to an increase of 3.3% m-o-m in April, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).
HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled February 3rd 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: “Egypt’s inflation remains largely contained towards the lower end of the CBE target range of 7% (+/-2%) for 4Q22. We, however, expect inflation to average 7.0% in 1Q22, as we expect a pick up in food and gasoline prices reflecting global inflationary pressures. We continue to believe that carry trade is essential for supporting Egypt’s net international reserves (NIR). More so as demonstrated by the net foreign liability (NFL) position of the Egyptian banking sector (excluding the CBE), which increased to USD7.12bn in November from USD USD4.8bn in the previous month. Accordingly, we perceive continued pressure to maintain the current levels of Egyptian treasuries interest rate. Currently, Egyptian treasuries offer a real return of c4% (given 12M T-bill rate of 13.2%, taxes for US and EU investors of 15%, and our 2022e inflation forecast of 7.2%). Even though the US Federal Reserve might start increasing interest rates in March, US 2-year notes are expected to offer a negative real return of -2.2% given Bloomberg consensus estimates of 2022 2-year notes rate of 1.4% and average US inflation of 3.6% over 2022-23. Currently, Turkey offers a real return of 3.8% on our calculations (based on its 2-year note rate of 22.6%, zero taxes on Turkish treasuries, and Bloomberg inflation consensus estimates of 18.8% on average over 2022-23). We note that Egypt’s credit default swap (CDS) is currently at 550 bps, just above Turkey’s CDS of 527 bps. Accordingly, we believe that Egypt’s carry trade remains attractive at the current levels, and with inflation remaining within the CBE’s target range, we expect the CBE to maintain rates unchanged in its upcoming meeting.”
It is worth mentioning that, in its last meeting on 16 December, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the ninth consecutive time. Egypt’s annual headline inflation came in at 5.9% in December, with monthly inflation decreasing 0.1% m-o-m, reversing an increase of 0.1% in November, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).
HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled October 28th 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: “Egypt’s inflation remains within the CBE target range of 7% (+/-2%) for 4Q22, and we expect it to average 5.9% in 4Q21. We, however, believe that rising international prices of oil and other commodities impose significant inflationary pressures domestically, especially in light of recent official announcements of the government’s intention to reduce its subsidy bill. Globally, monetary tightening is coming on the scene, with Federal Reserve officials indicating they could start tapering stimulus spending before year-end. At the same time, the Bank of England Governor recently announced that the Central Bank should act to counter rising inflation. We believe that the prospects of global monetary tightening reflected in some mild interest rate pressures on Egyptian 12-months T-bill yields, which increased by 13bps since the beginning of October. We also note that Egyptian banks’ net foreign liability position widened to USD4.44bn in August from USD1.63bn in July. This should also impose upward interest rate pressures on Egyptian treasuries, in our opinion. Currently. However, Egyptian 12-months T-bills continue to offer attractive real return of c3% (given our 2022e inflation forecast of c8% and 15% taxes for European and US investors). This is compared to c4% offered by Turkey (based on the recent 9-months T-bill rate of 18.25%, zero taxes, and Bloomberg 1-year inflation estimate of c14). That said, we expect the MPC to keep rates unchanged in its upcoming meeting. ”
It is worth mentioning that, in its last meeting on 16 September, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the seventh consecutive time. Egypt’s annual headline inflation came in at 6.6% in September, with monthly inflation increasing 1.1% m-o-m compared to an increase of 0.1% m-o-m in August, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS). With the MPC due to meet on 28 October, we present our expectations on the likely outcome based on Egypt’s current situation.
HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled September 16th 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: “Egypt’s inflation remains closer to the lower end of the CBE target range of 7% (+/-2%) for 4Q22, and we expect it to average 5.6% in 4Q21. We believe that the Federal Reserve’s recent announcement of unlikely interest rate hikes in the near future partly relieved the pressure on Egypt’s treasury yields by renewing the interest in emerging markets carry trade. Accordingly, Egyptian treasury bill yields declined by an average of 40 bps since mid-August, reflecting higher foreign portfolio inflows during August. Foreign holding of Egyptian treasuries increased to USD33.0bn in August from USD29.0bn in May, according to S&P Global Ratings. We also believe that a rebound in foreign currency receipts from tourism following the resumption of Russian flights to Egypt’s Red Sea resorts released some interest rate pressure on the EGP. Going forward, we believe that the interest rate action of other emerging markets will determine the pace of future declines in Egypt’s treasury yields. Currently, Turkey offers c19% on its 1-year treasuries (hence a real yield of 5.45% given zero taxes and Bloomberg 2022 inflation estimate of 13.4%) compared to Egypt’s real yield of 3.0% (given our 2022e inflation forecast of c8% and 15% taxes for European and US investors). Also. according to CBE data, the corporate borrowing rate is currently at around 9.4%, while the risk-free after-tax rate is around 10.4%. Therefore, we believe that any interest rate cuts at the moment could lead to a wider gap between the corporate and the risk-free rates, with the corporate rate being on the lower end. We accordingly expect the MPC to keep rates unchanged in its upcoming meeting.”
It is worth mentioning that, in its last meeting on 5 August, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the sixth consecutive time. Egypt’s annual headline inflation came in at 5.7% in August, with monthly inflation increasing 0.1% m-o-m compared to an increase of 0.9% m-o-m in July, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).
About HC Securities:
HC Securities & Investment (HC) 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, online trading and private equity 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 USD6.2bn. HC Asset Management, winner of the 2018 MENA Fund Manager Awards, now manages 9 mutual funds for commercial banks and portfolios for institutions and sovereign wealth funds with assets under management in excess of EGP6.8bn. 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.
Despite subdued inflation rates, HC expects the CBE to keep interest rates unchanged
In its latest report about their expectations on the likely outcome of the MPC meeting scheduled on 13 August and based on Egypt’s current situation, HC Securities & Investment expects the CBE to maintain rates unchanged despite subdued inflation rates.
Head of macro and financials at HC, Monette Doss commented: “Inflation levels remains subdued coming in well below the CBE target of 9% (+/- 3%) for 4Q20 and also less than expected 4.6% y-o-y for July, which we attribute to low consumer demand arising from increasing unemployment and plunging consumer confidence. This together with a delay in expected tourism recovery prompt us to downward revise our 2H20e average inflation expectation to c6% y-o-y from c8% y-o-y, previously. In our new estimates, we remain cautious accounting for possible supply shocks. We hence, expect monthly inflation to average 0.8% m-o-m in 2H20e up from an average of 0.4% in 1H20. As of June, real interest rate on deposits and loans came in at 3.4% and 5.6%, respectively, significantly higher than their 12-year average of -3.5% and 0.7%. The high real interest rate environment, however, is justified by the low interbank liquidity, global economic uncertainty and the domestic funding gap, in our view. We take the CBE open market operations as a proxy for interbank liquidity. The figure came in at EGP420bn in June representing 13% of total banking sector local-currency deposits, below its 2008-2020 average of 22% (excluding 2011-2014 which witnessed post-revolution liquidity dry-up).”
“Moreover, following the outbreak of COVID-19 in Egypt in March, foreign portfolio outflows from Egyptian treasuries amounted to USD17bn increasing Egypt’s FY19/20e domestic funding gap to USD21bn, representing c6% of GDP, and taking Egypt’s foreign debt to an estimate of USD125bn in June from USD109bn last year. Using the Sharpe ratio for yields on Egyptian treasuries as well as other emerging markets, we believe that at current levels Egypt provides the highest risk-adjusted return coupled with low currency volatility, second only to Argentina whose currency display significantly high volatility. We believe this permits the government to remain on current interest rate levels, despite the increase in funding gap. We believe that this is behind the recent rebound in foreign portfolio inflows into Egyptian treasuries said to amount to USD3bn during the first 2 weeks of July, according to unnamed banking sources. That said and despite subdued inflation rates, we expect the MPC to maintain rates unchanged in its upcoming meeting maintaining the attractiveness of treasury yields to foreign investors and also reflecting relatively tighter liquidity in the Egyptian banking sector.” Monette Doss added
It is worth mentioning that, in its last meeting on 25 June, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the third time after undertaking a 300bps rate cut on 16 March in an unscheduled meeting. Egypt’s annual headline inflation accelerated to 5.7% in June from 4.7% in the previous month, with monthly inflation remaining subdued at 0.1% m-o-m up from showing no increase in May, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).