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Securities & Investment

Month: March 2022

Our take on the CBE’s interest rate decision, EGP movement and newly introduced CDs

Posted on by Marwa Nakhla

The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) has decided in a special meeting today to raise the key policy rates by 100 bps, it announced in a release. The Egyptian pound devalued to EGP18.22/USD, according to Bloomberg. Banque Misr and the National Bank of Egypt offered one-year certificates of deposits (CDs) at an interest rate of 18%, according to banking sector data. (CBE, Bloomberg, Banking sector data)

HC’s comment: Overall, we are positive on the CBEs today’s decisions, including the 100 bps increase in policy rates, the EGP devaluation by more than c10%, and public banks offering one-year CDs at an interest rate of 18%,  as they are a better reflection of the economic fundamentals and hence remove distortions that negatively affect economic activity. Although the decisions could negatively impact consumer demand in the short term, they will potentially contain inflation, stop dollarization, attract foreign portfolio investments, enhance foreign currency supply with a positive spillover effect on economic activity, compared to a standstill that could occur due to foreign currency shortages. We see the stock market reacting positively to the move; however, the 18% CDs could, to an extent, compete with investment in the Egyptian stock market; but, we still expect the stock market to rebound from current levels as it was heavily oversold. We expect a rate increase of 150 bps throughout 2022 but we now believe that it could occur faster than we previously expected. The high-yielding CDs will serve different purposes, such as partially containing inflationary pressures, supporting households’ disposable incomes in light of the EGP devaluation, and stopping dollarization. We also believe that the combination of EGP devaluation along with higher interest rates will result in a rebound in Egypt’s carry trade and help finance Egypt’s external funding needs. We believe that carry trade could rebound at a yield of 14.2%-14.5% for 12M T-bills, implying a real return of around c1% on our calculations. This will make Egypt more competitive in the carry trade market compared to Turkey, with its Bloomberg 2022e inflation estimate at c44% and its recent 1-year note offering a yield of c22%. The EGP devaluation to a rate of EGP18.22/USD, exceeded our estimate of EGP16.70/USD by 8.34%. Over the coming months, we believe that the exchange rate will be flow-driven and could show some appreciation depending on the rebound in carry trade.

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).