Amid macroeconomic developments and geopolitical tensions, HC Securities & Investment forecasts the Central Bank of Egypt (CBE) to maintain interest rates unchanged in its upcoming Monetary Policy Committee (MPC) meeting scheduled for October 17, 2024.
External Position Improvement
Nemat Choucri, Head of Equity Research at HC, commented on Egypt’s external position, noting significant improvements in several areas:
- Balance of Payments (BoP): Egypt’s BoP surplus for the fourth quarter of FY 2023/24 widened by approximately 9 times year-on-year and 22% quarter-on-quarter, reaching USD 5.55 billion.
- Net Foreign Assets (NFA): The Egyptian banking sector remained in a net foreign asset position of USD 9.73 billion in August 2024, although this was USD 3.54 billion lower compared to the previous month. This shift marks a reversal from a net foreign liability (NFL) position of USD 25.9 billion in the same period last year.
- Net International Reserves (NIR): Egypt’s NIR increased by USD 140 million month-on-month in September 2024, bringing reserves up to USD 46.737 billion from USD 46.597 billion in August.
- Credit Default Swaps (CDS): Egypt’s 1-year CDS dropped significantly, standing at 407 basis points (bps) currently, down from 857 bps at the start of 2024.
Domestic Economic Challenges
Despite these improvements, Egypt’s economic activity remains limited due to high interest rates, which have dampened private sector investments. Egypt’s Purchasing Managers’ Index (PMI) fell below the 50.0 mark in September 2024, registering at 48.8, indicating a contraction in the non-oil private sector. Rising prices have stifled sales and slowed overall business activity, contributing to a GDP growth rate of 2.4% for the fourth quarter of FY 2023/24, down from 3.8% in the previous year. Geopolitical tensions have also played a role in this deceleration.
Government Response to Stimulate Growth
To counteract these economic headwinds, the Egyptian government has announced plans for investment incentives and tax relief packages aimed at boosting both domestic and foreign investment. These measures are expected to drive future GDP growth by stimulating private sector involvement in the economy.
Inflationary Pressures Expected to Rise
Regarding inflation, HC predicts that Egypt’s headline inflation rate will accelerate by 1.0% month-on-month to 26.5% year-on-year in October 2024. This increase is attributed to higher electricity prices introduced in September for households, retail, and industrial sectors, alongside potential rises in energy costs. The government’s pricing committee is set to meet in October to discuss gasoline and diesel prices for the fourth quarter, which could further drive inflation. Additionally, the Egyptian Natural Gas Holding Company (EGAS) is considering increasing natural gas prices for the industrial sector by 10-30% due to the higher cost of imported natural gas.
Interest Rate Outlook
HC also analyzed the current interest rate landscape, highlighting that Egypt’s latest 12-month T-bill rate of 26.238% offers a real interest rate of 3.00%, after accounting for a 15% tax on US and UK investors and estimating inflation at 19.3% over the next 12 months. This real rate is higher than the US 12-month T-bill rate of 1.86%, but lower than Turkey’s 12-month T-bill real rate of 17.4%.
Although Egypt could benefit from a rate cut to stimulate GDP growth, HC believes the MPC will delay any rate reduction until later in the year due to the expected rise in inflation during October. As a result, HC expects the MPC to maintain interest rates at the upcoming meeting on October 17, 2024.
Recent MPC Decisions
It’s worth noting that the CBE’s MPC kept interest rates unchanged during its September 5, 2024 meeting, leaving the overnight deposit rate at 27.25% and the lending rate at 28.25%. This decision followed a series of rate hikes amounting to 600 basis points (bps) in March 2024, bringing the total rate hikes to 1,900 bps since the start of its tightening policy. This includes 300 bps in 2022, 800 bps in 2023, and 800 bps in 2024.
Egypt’s annual headline inflation increased to 26.4% year-on-year in September 2024, up from 26.2% in August, as reported by the Central Agency for Public Mobilization and Statistics (CAPMAS). Monthly inflation also remained high at 2.1%, identical to the 2.1% increase in August.
Global Interest Rate Movements
Globally, interest rate trends have also been dynamic. On September 19, 2024, the US Federal Reserve cut its federal funds rate by 50 bps to a range of 4.75-5.00%, following a series of hikes totaling 525 bps since 2022. The European Central Bank (ECB) also lowered its key interest rates, reducing rates for the main refinancing operations, marginal lending, and deposit facility by 25 bps in both June and September, bringing them to 3.65%, 3.90%, and 3.52%, respectively.
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