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Securities & Investment

Tag: GDP growth in Egypt

HC expects the CBE to cut interest rates by 150 bps at its upcoming

Posted on by Marwa Nakhla

  • In light of Egypt’s macro economy developments and the geopolitical conditions, HC Securities & Investment expects the CBE to cut interest rates by 150 bps at its upcoming April 17, 2025 meeting.

Financials analyst and economist at HC, Heba Monir commented: “ Egypt’s external position witnessed a mixed performance with (1) the banking sector’s net foreign asset (NFA) position widening by USD1.48bn m-o-m to USD10.2bn in February from USD8.71bn in January, reversing a net foreign liability (NFL) position of USD22.0bn a year earlier, on narrowing mainly the banking sector’s NFL position (excluding the CBE) by USD1.38bn m-o-m, reflecting lower pressures on foreign currency liquidity, (2) net international reserves (NIR) increasing by USD363m m-o-m in March to USD47.757bn from USD47.394bn in February, mainly due to a c6% m-o-m noticeable increase in gold, and deposits not included in official reserves also increasing by USD398m m-o-m to USD11.065bn in March, and (3) Egypt 1-year CDs hiking to 525 bps in April from 379 bps as of December, negatively impacted by the global economic turmoil from the US tariffs and its implications on foreign portfolio investment outflows, which in its turn impacted Egypt’s FX rate. Foreign investors sold USD1.04bn worth of treasuries in the secondary market since the beginning of this week and as of Tuesday, and the daily interbank volume jumped to USD1.12bn on Sunday from its daily average at USD150-250m, retreating to USD700m on Monday, USD300m on Tuesday and increasing again to USD955m yesterday. Domestically, real GDP grew by 4.30% y-o-y and 0.2% q-o-q in 2Q24/25 from enhanced exports. The PMI index fluctuated, retreating slightly below the 50.0 neutral mark to 49.2 in March, mainly from a weakening in the new orders after it exceeded the 50.0 mark in January and February on an easing in the inflationary pressures with improved consumer spending. Regarding inflation, March’s reading came higher than our estimate of 12.4% and higher than the Reuters consensus median estimate of 12.6%, which we attribute to higher-than-expected food and beverage prices due to seasonality, with Ramadan occurring in March. As for the T-bills auctions, yields are fluctuating, with the latest 12M T-bills auction of 24.95% reflecting a positive yield of 9.42% on the 12M inflation estimate of 11.8% (after deducting a 15% tax rate for European and US investors). The estimated average required rate of return by foreign investors on 12M T-bills is also declining to 28.0% from 29.3% in mid-February, based on our calculations, considering a lower inflation differential and the recent hike in Egypt’s 1-year CDs, close to the average interest rate on 3M T-bills of 28.24%, given the current inverted yield curve, as shown in the chart below (3M T-bills higher than 12M T-bills). From the above, we conclude that the Egyptian economy was able to contain the inflationary pressures (albeit still above the CBE’s targets; however, on a downward trend mainly due to base effect), our carry trade is still attractive, and there is a noticeable improvement in the NFA position of the banking sector, allowing the smooth recent exit of some foreign investors from our treasuries market. Therefore, we expect the MPC to cut interest rates by 150 bps at its upcoming 17 April meeting, mainly to stimulate local economic growth, considering global recessionary fears.”

It is worth mentioning that, in its 20 February meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) maintained the benchmark overnight deposit and lending rates unchanged at 27.25% and 28.25%, respectively, for the seventh consecutive times, after it hiked them by 600 bps in March 2024, bringing total rate hikes to 1,900 bps since it started its tightening policy in 2022. Egypt’s annual headline inflation accelerated to 13.6% y-o-y in March from 12.8% y-o-y in February, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 1.6% m-o-m compared to a 1.4% m-o-m increase in February. On the global front, on 19 March, the U.S. Federal Reserve maintained the target range for the federal funds rate at 4.25-4.50%, leaving the total cuts at 100 bps after it hiked rates by 525 bps since it started tightening policy in 2022, while the European Central Bank (ECB) lowered the key ECB interest rates for the deposit facility, the main refinancing operations and the marginal lending facility by 25 bps on 6 March to 2.50%, 2.65% and 2.90%, respectively, bringing total cuts to 150 bps, since it started cutting rates in June 2024 after it hiked rates by 450 bps since it started its tightening policy in 2022.

 

 

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: Egypt macro, FX shortage weighs on economic growth

Posted on by Marwa Nakhla

Egypt macro

FX shortage weighs on economic growth

  • Low FX liquidity is fueling soaring inflation and affecting GDP growth, in our view. We expect an FX adjustment when Egypt improves its FX supply

  • We see the current account deficit turning into a surplus with a moderate expansion in external debt over FY23/24e, impacted by recent rating downgrades by Moody’s, S&P, and Fitch

  • We expect the budget deficit to widen to 7.1% of GDP in FY23/24e on higher interest expense and social benefits 

HC shared their outlook recently about Egypt’s macro economy in 2024 addressing the main GDP growth drivers and expectations on the EGP, Inflation rates and the state general budget.

Economist and financial analyst at HC, Heba Monir commented: “ FX shortage and monetary tightening constraining GDP growth, in our view: Egypt’s real GDP growth decelerated to 3.8% in FY22/23, and we expect it to increase to 4.0% in FY23/24e, slightly lower than the government’s target of 4.1%, yet higher than the IMF’s October 2023 estimate of 3.7%. However, lower-than-expected tourism revenue by c15% y-o-y due to the Israeli-Hamas war could lower our GDP growth estimate for FY23/24e to 3.3% and narrow the overall balance of payments (BoP) surplus by c50%. Our estimates reflect an EGP devaluation of c37% y-o-y in FY22/23 and of c19% y-o-y in FY23/24e, based on our real effective exchange rate (REER) model, compared to a c6% y-o-y EGP devaluation in FY21/22. The EGP devaluation, mainly triggered by foreign portfolio outflows following the outbreak of the Russian-Ukrainian war, fueled inflationary pressures and negatively affected corporate borrowing and private consumption. We expect GDP growth in FY22/23e to be driven by higher private consumption (+5.9% y-o-y), higher FDIs (+28.4% y-o-y), and a narrowing trade deficit, while in FY23/24e, besides the improved trade deficit, we expect a rebound in public investments (+47.8% y-o-y) to drive GDP growth, despite lower government consumption (-2.90% y-o-y).”

Monir continued: “ We expect inflationary pressure to persist in FY23/24e, reflecting the EGP devaluation: We expect inflation to accelerate to an average 33.2% y-o-y in FY23/24e, from 24.1% in FY22/23 and 8.48% y-o-y in FY21/22 as we expect inflationary pressures to persist following Russia’s withdrawal from the Black Sea Grain Initiative, supply shortages, weakening EGP, higher oil prices, and the impact of El Niño on commodities’ prices. We expect inflation to decline gradually on base effect to 26.1% by June 2024. To control inflation and anchor inflation expectations, the Central Bank of Egypt (CBE) increased policy rates by 1,100 bps since FY21/22, and we expect it to leave rates unchanged at its 21 December meeting since inflation is supply-driven. In 2024e, we expect an improvement in the government’s partial asset sale program, tourism, Suez Canal, and Egypt’s worker remittances to possibly trigger the start of monetary easing, which would lead to a higher GDP growth in FY24/25e, on our numbers. The Egyptian government recently secured USD2.63bn from selling public stakes in companies in July and September and is on track to sell public stakes and assets worth more than USD2bn by the end of June 2024.”

“The BOP reversed into a surplus of USD882m in FY22/23, which we project to narrow to USD529m in FY23/24e on lower borrowing by banks: Egypt’s balance of payments (BOP) recorded an overall surplus of USD882m in FY22/23, reversing a deficit of USD10.5bn a year earlier, mainly due to a significant narrowing in the current account deficit on lower imports and improved tourism and Suez Canal revenues. For the same reasons, we expect the BOP to record an overall surplus of USD529m in FY23/24e. We anticipate the current account deficit to turn into a surplus of USD1.31bn in FY23/24e (c0.4% of GDP), from a deficit of USD4.71bn in FY22/23, versus the IMF’s deficit estimate of USD8.63bn (2.41% of GDP), on a lower trade deficit, in our view. Regarding Egypt’s external debt, which reached USD165bn by the end of June 2023, we estimate that the government repaid around USD33.9bn in FY22/23 and rolled over some USD24.0bn (mostly GCC deposits), representing c41% of its total dues for FY22/23 with a scheduled repayment of USD24.7bn in FY23/24e. We forecast a moderate increase in FY23/24e’s external debt, constrained by debt capacity and the recent rating downgrades by Moody’s, S&P, and Fitch, leading Egypt to resort to Asian markets to issue Panda and Samurai bonds with a value of around USD979m and considering tapping the Indian market. We forecast the financial account surplus to narrow by c13% y-o-y to USD7.82bn in FY23/24e with a net inflow in Egypt’s portfolio investment of USD0.18bn versus an outflow of USD3.77bn in FY22/23. The banking sector’s net foreign liabilities (NFL), including the CBE, widened c36% y-o-y to USD27.1bn as of June 2023. We estimate it to narrow by c6% y-o-y to USD25.5bn by June 2024, on an improvement in foreign currency inflows, including proceeds from the government’s partial asset sale program and improving FDIs in the services sector, especially in real estate, finance, and information technology. Following the delay in the IMF program review of March and September, related to the USD3.0bn Extended Fund Facility (EFF) Egypt secured in December 2022, Egypt’s 1-year CDS fluctuated over the 11M23, reaching 1,122 bps currently from 499 bps in January, after it resumed its partial asset sale program. In our view, Egypt’s commitment to the IMF’s reforms, most importantly leveling the playing field with the private sector, is essential to attract FDIs again and restore FX liquidity.” Monir added.

Heba Monir concluded: “ We estimate the budget deficit to widen to 7.1% of GDP in FY23/24e mainly on higher interest expense: Egypt’s budget deficit reached 6.1% of GDP in FY22/23, similar to FY21/22’s level, while we estimate it to widen to 7.1% of GDP in FY23/24e, reflecting a cash deficit of EGP810bn, c5% lower than the government estimate of EGP849bn. Our FY23/24e budget estimates assume c54% y-o-y higher total revenues of EGP2.13trn, in line with the government’s estimate (-1%), on a c25% y-o-y higher tax revenue and a 2.87x y-o-y hike in non-tax revenue. We expect expenditures to increase c44% y-o-y to EGP2.94trn, c2% lower than the government’s estimate. We forecast interest expense to increase by c29% y-o-y to EGP757bn in FY22/23e and by c55% y-o-y to EGP1.17trn in FY23/24e, representing c37% and c40% of total expenditures in FY22/23e and FY23/24e, respectively, higher than its 5-year historical average of c36%, mainly due to the 1,100 bps increase in key policy rates since the start of 2022.”

 

 

HC comments on the MPC’s 50 bps interest rates cut

Posted on by Marwa Nakhla

  • The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) has decided to cut the benchmark overnight deposit and lending rates by 50 bps to 8.75% and 9.75%, respectively, at its meeting on Thursday, according to a press release. The CBE has also cut the rate of its main operation and the discount rate to 9.25%, it announced.

HC’s comment

The MPC’s decision came in against our, as well as consensus, expectation of keeping rates unchanged. We believe the MPC’s decision, together with the recent announcements by commercial banks to reduce interest rates on their CDs by 2.0%–3.5%, and canceling the 1-year 15% CDs aims at encouraging consumer spending as a significant driver for GDP growth. This also coincides with the government’s efforts to promote the role of the private sector as the main player in the economy, building on pre-COVID-19 growth trends where private consumption grew by 5.3% y-o-y in 1Q20, the highest rate since FY12/13 where it averaged 2.9% over FY12/13–FY18/19. Also, private investments grew at c14% y-o-y in 9M19/20 (in real terms) outpacing government investment which declined by c5% y-o-y. Having said that, we however believe that the decline in policy rates could have a limited short-term effect on consumption, as already much liquidity is allocated to the 1-year 15% CDs together with high unemployment rates. Moreover, we believe the rate cut will not necessarily correspond to a similar decline in T-bill rates. Yields on 12-month T-bills declined by only 100 bps since March despite the previous 300 bps rate cut undertaken by the CBE.