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HC: March inflation figures came in slightly higher than our estimates. We expect the CBE to keep interest rates unchanged

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled April 29th 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: “March inflation figures came in slightly higher than our estimates of 4.4% y-o-y and 0.5% m-o-m, which we believe reflects a correction from the previous suppressed levels. Over the rest of 2021, we expect monthly inflation to average 0.9% m-o-m and 6.7% y-o-y accounting for rising international commodity prices and a possible pick-up in economic activity following the successful rollout of the COVID-19 vaccine. We, therefore, expect 2021 inflation to remain within the CBE’s target range of 7% (+/-2%) for 4Q22. Looking at the results of recent government T-bill auctions, we believe that foreign portfolio inflows are gradually regaining momentum as evident in the high coverage and possibly the beginning of a cool-off in yields from accelerated increases witnessed over the last couple of months. In recent auctions, yields on US 10-year T-bonds declined to 1.57% from a high of 1.73% in the beginning of April, which we believe reflected positively on foreign portfolio inflows in Egypt. However, we expect to see upward pressure on US treasury yields with Bloomberg 2021 consensus inflation forecast for the US at 2.6%. Also, monetary tightening in other emerging markets, such as Turkey poses upward pressure on Egypt’s yields. Currently, Turkey offers a yield of 17.2% on 19M treasuries, resulting in a real yield of c4%, on our calculations, given zero taxes and Bloomberg consensus inflation estimate for Turkey at 13.2% over the period. This compares to a real yield of 3.9% on Egypt’s 12M T-bills, on our numbers, given 15% tax rate for US and European investors and our inflation forecast of 7.5% over the next 12 months. That said, we expect the MPC to maintain rates unchanged in its upcoming meeting.

It is worth mentioning that, in its last meeting on 18 March, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the third consecutive time after undertaking cuts of 50 bps twice in its September and October 2020 meetings. Egypt’s annual headline inflation remained unchanged at 4.5% in March, with monthly inflation increasing 0.6% m-o-m compared to an increase of 0.2% in February, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

HC Perceives upward interest rate pressures, CBE to keep interest rates unchanged

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled February 4th and based on Egypt’s current situation, they Perceive upward interest rate pressures and expect the CBE to keep interest rates unchanged.

Head of macro and financials at HC, Monette Doss commented: “We expect January inflation to come in at 5.2%, near the lower end of the CBE’s new target range of 7% (+/-2%) for 4Q22. We, however, perceive upward interest rate pressures as was manifested in rising yields and relatively weaker coverage in the last government T-bill and T-bond auctions. In this regard, we note that Egyptian treasuries are now facing higher competition from Turkey which increased its policy rates by 200 bps on 24 December, taking its 15M treasuries to 15.97% up from an implied rate of 10.66% previously. Given Bloomberg estimates for 2021 inflation in Turkey at 12.2%, the Turkish treasuries now offer 3.8% real return similar to Egypt’s real return of 3.8% (given Egypt’s 12M yields at 12.99%, 15% tax rate for American and European investors and our 2021e inflation forecast of 7.2%). On a different front, banking sector liquidity, as indicated by the CBE’s deposit auctions, declined to represent c11% of total local currency deposits in November from c13% in October. We also believe that currently, the high-risk business environment poses upward interest rate pressures. Even though the Egyptian economy has shown high resilience in absorbing the repercussions of the pandemic, global uncertainty had its toll on different sectors in Egypt especially tourism and export-related sectors increasing their risk and also posing interest rate pressures, in our view. That said, we expect the MPC to keep rates unchanged in its upcoming meeting on 4 February.

 

It is worth mentioning that, in its last meeting on 24 December, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged after undertaking cuts of 50 bps twice in its September and November meetings. Egypt’s annual headline inflation decelerated to 5.4% in December from 5.7% in the previous month, with monthly inflation decreasing 0.4% m-o-m compared to an increase of 0.8% m-o-m in November, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

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 expects the CBE to cut interest rates 50bps

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled November 12th and based on Egypt’s current situation, they expect the CBE to cut interest rates 50bps.

Head of macro and financials at HC, Monette Doss commented: “We believe October inflation figures could accelerate further to 4.2% y-o-y and 1.5% m-o-m mainly impacted by the back-to-school season, however, it would still remain well below the CBE’s target of 9% (+/- 3%) for 4Q20. We believe high unemployment levels and suppressed consumer spending are the main factors underlying low inflation levels, while monetary easing started to bear fruit in October as indicated by Egypt’s Purchasing Manager Index (PMI) coming in at 51.4 signaling economic expansion for the second consecutive month. Based on our October inflation forecast, we estimate Egypt’s real interest rates on short-term deposits and loans at 4.4% and 5.9%, respectively, significantly above their 12-year average of -3.3% and 0.8%. Also, foreign portfolio investments in Egyptian treasuries recovered sooner than we expected reaching USD21.1bn in mid-October from USD10.4bn in May, according to official announcements, resulting in the Egyptian banking sector increasing its net foreign assets position to USD2.06bn in September, excluding the CBE, reversing a net foreign liability position of USD1.09bn in August. Compared to other emerging markets, Egypt offers attractive real after-tax yields of 3.56% (based on 1-year T-bill rate of 13.6%, 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 better risk profile with its 5-year foreign currency CDS at 408 currently, compared to 528 for Turkey. That said, we expect the CBE to cut interest rates 50bps in its upcoming meeting in order to stimulate private investment and consumption and drive GDP growth, especially in light of a potential second COVID-19 wave. We expect this to have almost no effect on foreign portfolio inflows in Egyptian treasuries, with its yields declining by only 100 bps since March, despite a total of 350 bps rate cuts by the CBE over the same period of time.

It is worth mentioning that, in its last meeting on 24 September, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to cut rates by 50 bps after keeping them unchanged for 4 consecutive meetings since April.  Egypt’s annual headline inflation accelerated to 3.7% in September from 3.4% in the previous month, with monthly inflation increasing 0.3% reversing a decline of 0.2% in August, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

Inflation levels remain subdued and 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 24 September and based on Egypt’s current situation and the inflation levels, HC expects the CBE to keep interest rates unchanged. 

Head of macro and financials at HC, Monette Doss commented: “Inflation levels remain subdued coming in well below the CBE target of 9% (+/- 3%) for 4Q20 and also less than our earlier expectation of 4.2% y-o-y for August, on declining food prices in addition to low consumer spending on other non-food items, in our view. We now expect inflation to average c5% in 4Q20 down from our earlier estimate of c6%. Real interest rates in Egypt reached a high of 4.7% and 7.0% on short-term deposits and loans, respectively, significantly above their 12-year average of -3.3% and 0.8%. We, however, believe that the high real interest rate environment is justified by relatively low liquidity in the banking sector as well as the net foreign liability position held by banks currently. The CBE open market operations, as an indicator for interbank liquidity, declined to c10% of total local currency deposits in August well below its 12-year average (excluding 2011-2013) of c21%. On another front, the banking sector has been holding a net foreign liability position since the massive foreign portfolios outflows that took place in March, however, partially narrowing to USD1.8bn in July. We accordingly expect interest rates, including the 1-year 15% CDs offered by public banks, to remain at elevated levels in order to preserve the banking sector liquidity. A larger scale rebound of foreign portfolio inflows would enhance interbank liquidity and result in cooling off T-bill yields from current levels, in our view. That said, we expect the MPC to keep interest rates unchanged in its upcoming meeting.

It is worth mentioning that, in its last meeting on 13 August, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the fourth time after undertaking a 300bps rate cut on 16 March in an unscheduled meeting.  Egypt’s annual headline inflation decelerated to 3.4% in August from 4.2% in the previous month, with monthly inflation declining 0.2% m-o-m compared to an increase of 0.4% m-o-m in July, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).