HC Securities & Investment’s research team forecasts that the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) will keep interest rates unchanged at its upcoming meeting on 20 February 2025. The decision is expected as Egypt faces external economic challenges and geopolitical uncertainties, which could pressure foreign currency inflows and affect overall economic stability.
Financials analyst and economist at HC, Heba Monir, commented that Egypt’s external position witnessed a moderate decline, driven by several factors, including:
- Balance of Payments (BoP) Deficit: The first quarter of FY 2024/2025 saw the BoP shift into a USD 991 million deficit, compared to a USD 229 million surplus in the same period last year.
- Decline in the Banking Sector’s Net Foreign Assets (NFA): NFA narrowed by 12% month-on-month (m-o-m) in December, reaching USD 5.23 billion, while banks (excluding the CBE) widened their Net Foreign Liabilities (NFL) position by 10% m-o-m for the fifth consecutive month to USD 6.42 billion.
- Increase in External Debt: Egypt’s external debt rose by 1.52% quarter-on-quarter (q-o-q), reaching USD 155 billion in Q1 FY 2024/2025.
Positive Indicators Supporting Stability
Despite these external challenges, Monir pointed out several positive economic indicators, including:
- Increase in Net International Reserves (NIR): NIR grew by USD 156 million m-o-m in January 2025, reaching USD 47.3 billion, up from USD 47.1 billion in December 2024. Additionally, deposits not included in official reserves rose by USD 222 million to USD 10.17 billion.
- Improved Credit Risk Indicators: Egypt’s 1-year Credit Default Swap (CDS) declined to 332 basis points (bps) in January 2025, compared to 379 bps in December 2024.
- Positive Business Activity Growth: The Purchasing Managers’ Index (PMI) exceeded the 50-point threshold, recording 50.7 in January, signaling improved business conditions for Egypt’s non-petroleum sectors.
Inflation and Treasury Yields in Focus
Egypt’s headline inflation in January 2025 surpassed HC’s estimates of 22.8% and the Reuters consensus of 23.0%. Meanwhile, annual inflation slowed to 24.0% y-o-y, down from 24.1% y-o-y in December 2024, though monthly inflation rose by 1.5% m-o-m, compared to 0.2% m-o-m in December 2024.
As for Treasury yields, recent T-bill auctions indicated an upward trend in yields, especially for short-term maturities. The 3-month T-bill yield rose by 59 bps since January, reaching 27.5% in the latest auction, up from 26.9%.
Geopolitical Risks and Their Economic Impact
HC also noted that geopolitical tensions in the Middle East could affect Egypt’s economic stability, particularly Suez Canal revenues and potential foreign currency inflows. Additional concerns include:
- Potential disruptions in Suez Canal revenue recovery due to ongoing regional conflicts.
- Possible displacement of Gaza residents, as discussed in U.S. diplomatic statements, which could pose social and economic challenges for Egypt.
- External debt obligations and energy import costs, requiring Egypt to maintain competitive interest rates to attract foreign investors into the carry trade.
Global Interest Rate Trends
On the international front, global monetary policies are also influencing Egypt’s decision-making.
- U.S. Federal Reserve: The Fed maintained its federal funds rate at 4.25%-4.50% in its 29 January 2025 meeting, following 100 bps of cumulative rate cuts, after hiking rates by 525 bps since 2022.
- European Central Bank (ECB): On 30 January 2025, the ECB reduced key interest rates by 25 bps, setting rates for:
- Deposit facility: 2.75%
- Main refinancing operations: 2.90%
- Marginal lending facility: 3.15%
The ECB has now cut rates by 125 bps since June 2024, following 450 bps of hikes since 2022.
Conclusion
Given the tightened external economic position, ongoing geopolitical risks, and the necessity to sustain foreign currency inflows, HC expects the MPC to keep interest rates unchanged in its 20 February meeting. The delay in rate cuts aligns with the need to maintain Egypt’s attractiveness to foreign investors, particularly in Treasury markets, to support external liquidity stability.
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