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Egypt's economic wins may seal rate cut despite global sell-off

Egypt's economic wins may seal rate cut despite global sell-off

Cairo:  Egypt is poised to cut interest rates for the first time in six months as easing inflation and currency stability look set to override concerns of an emerging-market selloff.

The Monetary Policy Committee is expected to reduce the benchmark overnight deposit rate on Thursday by at least 100 basis points to 14.75%, according to 10 of 12 analysts surveyed by Bloomberg. The other two see no change in borrowing costs.

The decision would help the central bank accelerate economic growth. And with inflation easing to a four-year low, Egypt would still offer fixed-income investors one of the most profitable carry trades in emerging markets even as a raging trade war between the U.S. and China hits assets elsewhere.

“All macroeconomic indicators are pointing at an imminent rate cut,” said Radwa El-Swaify, head of research at Cairo-based Pharos Holding. “However if the central bank decides to continue with a conservative monetary policy, we wouldn’t be surprised.”

Egypt’s recovery has turned it into the Middle East’s fastest-growing economy following three years of grinding reforms enacted to secure a $12 billion loan from the International Monetary Fund. With the currency devalued by half and subsidies on items like fuel slashed to curb the budget deficit, inflation rocketed to over 30% before slowing.

The Egyptian pound’s current stability has combined with high interest rates to make the country a darling among bond investors hunting for yield. Egypt’s borrowing costs adjusted for inflation -- currently among the highest in emerging markets -- give authorities leeway to ease monetary policy, according to Mohamed Abu Basha, head of macroeconomic analysis at Cairo-based investment bank EFG-Hermes.

There’s “a margin to cut the interest rate without halting or affecting the competitiveness of the carry trade,” he said.

A reduction up to 300 basis points this year is unlikely to dent Egypt’s attractiveness for investors “given the positive reform story and the normalization of inflation,” according to Abu Basha, who has correctly predicted every Egyptian rate decision for the past two years.

Further cuts could also help private businesses that have struggled with high borrowing costs in recent years. At the same time, almost one-third of Egypt’s 100 million population -- the Arab world’s largest -- now lives in poverty, about double the figure at the start of the century.

Two-Track Recovery Makes Egypt an Investor Hit as Poverty Climbs

The central bank held rates in July as it awaited the effects of a recent wave of fuel and electricity price rises. Inflation data released this month seemed to give the green light: the annual rate slowed to 8.7% in July from 9.4% the month before.

El-Swaify said falls in the price of fruit and vegetables suggest August inflation will also be tamed, with the rate likely to remain below 10% for the rest of the year as the statistical effect of last year’s prices fades. The U.S. Federal Reserve’s decision in July to lower rates for the first time in a decade also supports an Egyptian cut, she said.

Way Higher
Egypt's real rate is among the highest within emerging markets' universe

“All indicators point to a big space for a 100 basis points rate cut this week, even when taking into consideration the recent global volatility,” Abu Basha said.

Source: Bloomberg

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