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Securities & Investment

Tag: Egypt interest rates

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 increase the policy rates by 1% in its coming meeting

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled November 2nd. 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 Egypt’s inflation to continue rising by 2.6% m-o-m and 38.0% y-o-y in October, similar to September’s figure, reflecting supply shortages of essential commodities and products mainly caused by the curbing of importation, exporting some crops and lack of USD availability and the seasonality effect of the partial start of schools and universities’ academic year. Moreover, Moody’s and S&P downgraded the Egyptian government’s long-term foreign and local currency issuer ratings with a Stable outlook. Besides the reasons mentioned by the rating agencies for the rating downgrade mostly related to Egypt’s worsening debt affordability, other concerning factors include  (1) the surge in Egypt’s 1-year CDS to 2,013 bps from 1,230 in mid-September, (2) the widening of the gap between the parallel and official FX rates to as much as c50% and c30% between the Real Exchange Rate (RER) and Real Effective Exchange Rate (REER) models, based on our calculations, (3) the increase of the inflation differential between the US and Egypt to 34.4% in 4Q23 from 33.8% in 3Q23, and (4) the increase of the 12M yield on US treasuries to 5.42% currently from 4.67% in January 2023 while Egypt offers a negative real yield of 4.0% currently on its 12M T-bills, based on the latest 12M T-bills auction offering a nominal yield of 26.4% compares to a positive real yield of c2.7% on US treasuries. For Egypt’s real yield calculation, we used a 15% tax rate for US, UK, and Europe investors) and an average inflation rate of 26.4% for for FY24. We also estimate that the 12M T-bills required return is c28%. On a more positive note, Egypt’s overall balance of payment (BoP) recorded a surplus of USD601m in 4Q22/23 and USD882m as well in FY22/23. Net international reserves (NIR) increased by 5.34% y-o-y and 0.12% m-o-m to USD35.0bn in September, and deposits not included in the official reserves increased by c6.4% m-o-m and 3.82x y-o-y to USD5.05bn in September. Egypt’s banking sector’s net foreign liabilities (NFL) narrowed by USD585bn m-o-m for the second consecutive month to USD25.7bn in August due to a USD995m m-o-m decline in the CBE’s foreign liabilities, according to CBE data. Excluding the CBE, the banking sector’s NFL widened by USD220m m-o-m to USD16.4bn due to a larger drop in banks’ foreign assets (excluding the CBE) by USD868m m-o-m versus a decline of USD648m m-o-m in banks’ foreign liabilities. Based on Egypt’s economic situation, and although the inflation spike is supply-driven rather than demand-driven, we forecast a total 200 bps policy rate hike before year-end, including 100 bps for the 2 November meeting as we believe that the rate hike may help defend the currency against dollarization and purchases of gold by Egyptian citizens, despite that we would still be in negative real yield territory until inflation normalize again.”

It is worth mentioning that, in its 21 September meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to maintain 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 accelerated to a record of 38.0% in September from 37.4% y-o-y in August, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 2.0% m-o-m in September compared to a 1.59% 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 next week, according to Bloomberg.

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 increase the policy rates

Posted on by Marwa Nakhla

  • 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 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 February 2nd. 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 expect the MPC to keep the policy rates unchanged to allow the market to absorb the 300 bps hike of the 22 December 2022 meeting. Also, the CBE declared that foreign investments in the Egyptian market exceeded USD925m in the week following the EGP/USD movement on 11 January 2023, mentioning that carry trade is becoming more attractive to foreign investors. We expect the headline urban inflation to accelerate and reach 23.5% in July 2023 before it retreats to 18.2% in December 2023, averaging 21.5% throughout 2023. We expect the EGP 1-Year T-bills to average around 20.6% in 2023 (accounting for a 15% tax rate for US and European investors), taking into the calculation a 200 bps rise in the corridor that we expect to materialize over the rest of the year. This considers fluctuations in Egypt’s CDS 1-Year, which currently records 504.7, down from its peak at 1,774 on 27 July 2022, yet still high compared to its record low of 181 on 17 September 2021. The EGP depreciated by c17% over the past month, registering EGP29.9/USD, due to the accumulated pressures on Egypt’s balance of payment (BoP) and high foreign debt obligations, although there was a slight improvement in (1) Net International Reserves (NIR) inching up 1.4% m-o-m for the first time since December 2020 versus a 16.9% y-o-y decline to USD34.0bn in December 2022, (2) the banking sector’s net foreign liability (NFL) position, excluding the CBE, narrowing by 16.7% m-o-m to USD13.7bn in November 2022 for the first time since July 2022 while widening by 93% y-o-y. The latest 12M T-bills auction yield of 18.57% (accounting for a 15% tax rate for US and European investors) offers a real yield of positive 0.57%, given our inflation expectation of 18.0% in January 2024, solidifying our view of a needed increase in policy rates until the end of the year.”

It is worth mentioning that, in its 22 December 2022 meeting, The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) decided to raise the benchmark overnight deposit and lending rates by 300 bps to 16.25% and 17.25%, respectively. This decision accelerated its tightening pace by 500 bps in 4Q22, raising policy rates by 800 bps during 2022. Meanwhile, headline urban inflation surged to 21.3% in December 2022, with an average of 13.8% during 2022. On the global market, the US Federal Reserve raised interest rates by 425 bps versus an average inflation rate of 6.5% during 2022.

 

HC believes a 200 bps rate hike is necessary to absorb the current pressures

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled September 22nd. Based on Egypt’s current situation, they expect the CBE to gradually raise the overnight deposit and lending rates by 100 bps in the coming meeting and then raise it by another 100 bps in the following meeting

Financials analyst and economist at HC, Heba Monir commented: “The annual August inflation is the highest recorded since May 2019, as the pricing of imported commodities at a higher exchange rate and supply bottlenecks negatively impacted it. At these levels, the annual inflation rate is well above the CBE’s pre-announced target of 7% (+/-2% for 4Q22), and we estimate it to average 14.3% until year-end. Furthermore, a few days ago, the Egyptian government decided to amend the natural gas pricing formula for nitrogen fertilizers producers, which should translate into higher crop prices and inflation rates. Regarding Egypt’s external position, we believe that pressure is accumulating given (1) our FY21/22e current account deficit estimate of 4.8% of GDP, up from 4.6% a year earlier, (2) July remittances declining c15% m-o-m  and y-o-y to USD2.38bn, (3) the banking sector’s (excluding the CBE) net foreign liability position reaching USD10.1bn in July, (4) the drop in foreign currency deposits, not included in the official reserves, to USD0.89bn in August from USD11.7bn in December, dropping 0.35% m-o-m and c92% y-t-d, (4) net international reserves settling at USD33.1bn in August representing 4.71 months of imports coverage, and (5) Egypt’s external debt repayment schedule showing dues (excluding GCC deposits) of USD12.1bn over FY22/23. Against this backdrop, we believe a 200 bps rate hike is necessary to absorb the current pressures. For the time being, we believe the MPC Committee will prefer to gradually raise the overnight deposit and lending rates by 100 bps in the coming meeting and then raise it by another 100 bps in the following meeting. Currently, Egypt offers a real yield on 12-month T-bills of 208 bps (given the current 12-month T-bills rate, our 12-month inflation estimate of 12.25%, and a 15% tax rate for European and US investors) compared to a real return on the US 1-year notes of negative 245 bps (given 1-year notes yield of 3.83%, Bloomberg average 12M inflation estimate of 6.28%, and assuming no taxes). Based on our assumptions and calculations, Egyptian 12-month T-bills need to increase in 2022 to 17.3% from 16.9% currently to remain attractive. ”

It is worth mentioning that, in the previous two consecutive meetings in June and August, the MPC decided to keep policy rates unchanged after it increased them by 300 bps y-t-d, including 200 bps in May and 100 bps in March, concurrent with the Federal Reserve’s cumulative interest rate hikes of 225 bps y-t-d. Egypt’s annual headline inflation accelerated to 14.6% in August from 13.6% in the previous month, with monthly inflation increasing 0.9% in August compared to an increase of 1.3% m-o-m in July.

 

HC expects the CBE to hike policy rates by 200 bps

Posted on by Marwa Nakhla

  • HC Securities & Investment shared their expectations on the likely outcome of the MPC meeting scheduled August 18th and based on Egypt’s current situation, they expect the CBE to hike policy rates by 200 bps.

Head of macro and financials at HC, Monette Doss commented: “ The July inflation figure came in higher than our estimate of 13.0% y-o-y, and we expect it to average 14.2% over the rest of the year, well above the CBE’s inflation target of 7% (+/-2% for 4Q22). Looking at Egypt’s external accounts, we believe that pressure is accumulating on the country’s balance of payment (BoP), including (1) our FY21/22e current account deficit estimate of 4.8% of GDP, up from 4.6% a year earlier, (2) April remittances declining c7% m-o-m to USD3.1bn, (3) the banking sector’s (excluding the CBE) net foreign liability position widening to USD11.5bn in June, (4) the drop in foreign currency deposits, not included in the official reserves, to USD0.89bn in July from USD11.2bn in December, (4) net international reserves settling at USD33.1bn representing 4.71 months of imports coverage, and (5) Egypt’s external debt repayment schedule showing dues (excluding GCC deposits) of USD12.1bn over FY22/23. Against this backdrop, we believe a 200 bps interest rate hike coupled with c9% currency devaluation to EGP21.2/USD is necessary to support the currency and combat dollarization. As such, we also perceive the possibility of reintroducing high-interest rate deposits by state-owned banks to boost remittances, especially with rising GCC income levels. Assuming full currency floatation and applying Egypt’s current 1-year USD sovereign credit default swap (north of 1,400 bps) together with Egypt-US inflation differential, we believe that 12M T-bill yields could increase to 18.3%, from 16.4% currently. At this rate, Egypt’s 12M T-bills will be offering a real yield of 288 bps (given our 12M inflation estimate of 12.7% and a 15% tax rate for European and US investors) compared to a real return on the US 2-year notes of negative 265 bps (given 1-year notes yield of 3.10%, Bloomberg average 12M inflation estimate of 5.75% and assuming no taxes). That said, we expect the MPC to hike policy rates by 200 bps in its upcoming meeting.”

It is worth mentioning that, in its last meeting on 23 June, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to keep key policy rates unchanged after increasing it by 300 bps y-t-d, including 200 bps in May and 100 bps in March, concurrent with the Federal Reserve Bank’s (Fed) cumulative interest rate cuts of 225 bps y-t-d. Egypt’s annual headline inflation accelerated to 13.6% in July from 13.2% in the previous month, with monthly inflation increasing 1.3% m-o-m, compared to a decline of 0.1% m-o-m in June, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).

HC: we expect the CBE to keep interest rates unchanged

Posted on by Marwa Nakhla

  • 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 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).

HC expects the CBE to keep interest rates unchanged

Posted on by Marwa Nakhla

  • 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: we expect the CBE to keep interest rates unchanged

Posted on by Marwa Nakhla

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.