HC: We believe that the MPC will opt to delay the cut until later in 2024

In light of Egypt’s macro economy developments and the geopolitical tensions, HC Securities & Investment expects the CBE to keep the interest rates unchanged in its upcoming meeting scheduled October 17, 2024

Head of Equity Research at HC, Nemat Choucri commented: “Egypt’s external position showed signs of improvement with (1) the 4Q23/24 balance of payments (BoP) surplus widening by c9x y-o-y and c22% q-o-q to USD5.55bn, (2) the banking sector remaining in a net foreign assets (NFA) position of USD9.73bn in August, however narrower by USD3.54bn m-o-m, and reversing a net foreign liability (NFL) position of USD25.9bn a year earlier, (3) net international reserves (NIR) increasing by USD140m m-o-m in September to USD46.737bn from USD46.597bn in August, and (4) Egypt’s 1-year CDS dropping to 407 currently, from 857 bps on 1 January.

However, Egypt’s business activity remains subdued due to the high interest rate environment impacting private sector investments. Egypt’s September PMI index dropped below the 50.0 mark to 48.8 after it surpassed it in August, signaling a renewed decline in business conditions across the Egyptian non-oil private sector, as rising price pressures dampened sales and slowed business activity and 4Q23/24 GDP reached 2.4%, translating into a GDP growth of 2.4% for FY23/24, down from 3.8% a year earlier, also impacted by geopolitical tensions.

To overcome this, the government plans to announce investment incentives and a tax relief package to encourage private local and foreign investments to drive GDP growth.

Regarding inflation, we expect the headline inflation to accelerate by 1.0% m-o-m to 26.5% y-o-y in October due to the electricity price increases to the household, retail, and industrial sectors in September and potentially higher energy prices in October with the government’s committee in charge of the indexation of gasoline and diesel prices scheduled to meet in October to discuss 4Q24 gasoline and diesel prices, and the Egyptian Natural Gas Holding Company (EGAS) considering increasing natural gas prices for the industrial sector by c10–30% depending on each industry, due to higher natural gas import costs.

Regarding interest rates, Egypt’s latest 12-month average T-bill rate of 26.238%, offers a real interest rate, of 3.00% (net of 15.0% tax on US and UK investors and using our inflation estimate one year from now of 19.3%), higher than the real interest rate on the US 12-month T-bill of 1.86%, yet lower than the real interest rate on Turkey’s 12-month T-bill rate of 17.4%.

So although a rate cut is needed to drive GDP growth, we believe that the MPC will opt to delay the cut until later in the year given the expected higher inflation in October, and hence we expect the MPC to maintain rates at its 17 October meeting.”

It is worth mentioning that, in its 5 September 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, after it hiked them by 600 bps in March, bringing total rate hikes to 1,900 bps since it started its tightening policy, including 300 bps in 2022, 800 bps in 2023 and 800 bps in 2024.

Egypt’s annual headline inflation accelerated to 26.4% y-o-y in September from 26.2% y-o-y in August, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data.

Monthly prices rose 2.1% m-o-m compared to a similar 2.1% m-o-m increase in August. On the global front, on 19 September, the US Federal Reserve cut the federal funds rate by 50 bps to 4.75-5.00% after it hiked rates by 525 bps since it started its tightening policy in 2022. Also, the European Central Bank (ECB) lowered the key ECB interest rates for the main refinancing operations, the marginal lending and deposit facility, by 25 bps in June and 25 bps in September to 3.65%, 3.90%, and 3.52%, respectively.