The Research Department of HC Securities and Investment issued its expectations regarding the possible decision of the Monetary Policy Committee in light of the current situation in Egypt. Central Bank of Egypt interest rates 200 basis points at its next meeting scheduled for Thursday, May 19.
“Inflation figures for April came in higher than our 12.3% estimate and the median estimate of analysts in a Archyde.com poll of 11.8%, driven by a 48.8% year-on-year increase in prices,” said Monet Doss, a senior macroeconomic and financial services analyst at HC. Fruits and vegetables, while the prices of bread and cereals increased by 28.5% on an annual basis, according to data from the Central Bank of Egypt and the Central Agency for Public Mobilization and Statistics.
She added, “We believe that there are several factors that led to food price inflation, including the seasonal increase in demand during Ramadan, the devaluation of the Egyptian pound by 18% since March 21, and the increase in global prices in the wake of the Russian-Ukrainian war.”
Doss continued: “Although food prices may calm down relatively next month as demand balances following Ramadan, we expect food prices to be the main driver of our expected average inflation at 14% over the remainder of 2022 due to weak strength. Purchasing resulting from lower currency levels (as revealed by the April PMI in Egypt at 46.9) is directing most of the demand to basic foodstuffs.”
On the other hand, we believe inflows benefiting from the price differentials are necessary at this stage to support Egypt’s net foreign reserves. However, it will be difficult for Egypt to attract them, given the massive selling in emerging markets by foreign investors.
Doss said, “We believe that it is still weak, with only 3-4% coverage of government treasury bills for nine-month and 12-month terms, and coverage of only 66% to 78% for shorter terms (in the offerings that took place from April 19 until now).”
She added, “We note that the yields of 3-month T-bills have increased by 170 basis points since the interest rate hike in March, while the 12-month T-bills have increased by only 49 basis points. Looking at our projected inflation estimates for the May period,” Doss indicated. December 2022 at 14% and a 15% tax rate on treasury bill income for US and EU investors, we believe 12-month Egyptian treasury bonds offer a negative real yield of 239 basis points.
She explained that in May, the Federal Reserve raised the interest rate by 50 basis points, raising the fixed yield of one-year T-bills to 1.99%, compared to 1.34% in March.
Accordingly, we expect pressure on the 12-month treasury bills to increase to 16.5%-17.0%, close to the H1 2019 average of 17.4% when inflation averaged 12.9% and corresponding to the average 12-month US Treasury yields. month at 2.39%.
Doss stated that in terms of the value of the Egyptian pound: “We believe that the risks are in the direction of decline because we believe that the currency rate will be determined by market dynamics, and we also expect larger flows coming out of the market due to more imports of production inputs and raw materials (following it was recently exempted from the requirements of a letter of credit). ) and given our estimates of the current account deficit for the fiscal year 21/22 projected at 4.0% of GDP.
She added, “We note that the net position of the Egyptian banking sector’s foreign currency liabilities (including the Central Bank of Egypt) expanded to $12.1 billion in March, compared to $3.39 billion in February.
Excluding the Central Bank, the net position of the Egyptian banking sector’s foreign currency liabilities shrank to $7.04 billion in March, compared to $11.8 billion in February.
