Flash Report /

Egypt Inflation Monitor: Inflation slows; interest rates to be maintained

  • February inflation slows down; driven by price declines in Food, Utilities & Healthcare

  • Headline & core inflation declined, as volatile items’ prices decline

  • CBE to keep interest rates on hold despite inflation slowdown and global monetary easing to preserve key USD inflows.

Al Ahly Pharos Securities Brokerage
11 March 2020

Inflation slows down as prices decline for Food and Clothing categories

Inflation in February 2020 fell to 4.9% YoY for total Egypt, from 6.8% YoY in January. This deceleration was supported by a price decline in the Clothing & Footwear category as well as a small 0.2% decline in Food & Beverages, in addition to a supportive base effect where February 2019 hit the highest inflation level of 2019 at 14.0%. 

Annually, the highest growing category remains Education, growing at 28.5% YoY followed by Transportation as well as Recreation & Culture, growing at 15.1 % and 12.9% YoY in February. The Food & Beverages category hitting decline of 2.3% represents the downward pressure causing the slowdown in inflation. 

Monthly inflation in February was unchanged from January. The highest growing category was Restaurants & Hotels at 0.7% MoM up from 0.3% in January, while the Clothing & Footwear dropped by 1.3%. With Food & Beverages falling 0.2% and the remaining categories staying almost unchanged, monthly inflation was brought down to 0.0%. 

February’s inflation reading for urban Egypt also fell to 5.3% YoY against 7.2% YoY in January and was unchanged on a monthly basis against a 0.7% MoM growth in January. The deceleration in monthly inflation, along with a supportive base effect brought down inflation level. The uptick in Restaurants & Hotels was offset by the negative growth of Clothing & Footwear.

Inflation driven by its heaviest constituents: Food, Utilities and Health

Annual inflation in February was driven by its top 3 heaviest constituents: Food & Beverages contributing 1.6% of the total 4.9% YoY inflation, Housing & Utilities responsible on its own for another 0.9% of YoY inflation, and Medical Care adding up another 0.5% to YoY inflation. These three categories alone scored half of February’s inflation, and their weights being the highest, offset the effect of other categories such as Clothing that saw higher growth rates at lower weights. The remaining categories had a less pronounced participation in total inflation of February. However, it is notable that Fruits & Vegetables contribution to inflation was minimal in February compared to its contribution in December and January’s inflation. 

The Food & Beverages category was mostly impacted by the Meat & Poultry category given its weight of 10%; the heaviest item in the Food category, despite its decline of 3.4%YoY. Meat & Poultry alone accounted for 0.5% YoY inflation from the total 1.6% YoY Food & Beverage Inflation. Followed by Vegetables and Cereals, each adding another 0.2% to total YoY inflation. 

On the monthly level, inflation in February was unchanged, whereby the growth in some categories was offset by their low weight and the decline in other heavier items. 

Headline & Core Inflation decelerate; Driven by Fruits & Vegetables volatility

Excluding volatile items from February’s headline inflation such as Regulated Items and Fruits & Vegetables, the core inflation for February fell to 1.9% YoY and -0.01% MoM, from 2.4% YoY and -0.2% MoM in January. On an annual basis, the volatility in Fruits & Vegetables prices remains contained relative to 1H2019 and has been stable for 3 consecutive months now, however, on a monthly basis, Fruits & Vegetables inflation fell to -3.7% in February from 0.5% MoM in January. Regulated items have showed no contribution in February’s monthly inflation; making it mainly driven by Fruits & Vegetables volatility while annual inflation was mostly driven by regulated items and a minimal presence for Fruits & Vegetables. 

Inflation to remain below 6% before picking up in November 2020

Inflation for total Egypt in February came below our expectations of 0.7% MoM and 5.7% YoY. Hence, inflation is forecasted to hit 4.5% YoY and 0.5% MoM in March 2020, then fluctuate within 4.5-5.5% YoY during 2020 before picking up again to 6-8% in 4Q2020 where the record-low inflation of 4Q2019 provide an unfavorable base effect. 

According to our forecasts, inflation should end FY2019/20 with an average of 5.1% YoY and end CY2020 at an average of 5.3% YoY. Additionally, we see inflation remaining in the single digits, and within the CBE’s monetary policy target of 9% (+/-3%) all through 2020 and 1H2021.

Rates to be maintained on 2 April 

We expect the CBE to pause the easing cycle at it waits to assess the new threats to both the Egyptian and the global economic performance. Despite the Fed accelerating their monetary easing with an emergency meeting on the 3rd of March where they cut the Fed Funds rate by 50 bps to a range of 1.0%-1.25%, and are expected to cut rates further on their next FOMC meeting on 17-18 March; and despite Egypt inflation deceleration in February, we still expect rates to be held. 

We see that the economic repercussions of the Coronavirus outbreak and the slowdown in the global economy are dampening investor appetite for EM debt investments. Egypt’s 3 major foreign currency sources are facing potential pressure: 1) Tourism revenues are facing a general reluctance of tourists to travel, governments advising against non-emergency travel, and more complex travel precautions and quarantines; 2) Remittances of Egyptians working abroad (mostly in the GCC) will be hit in case of a slowdown in gulf economies as a response to the sharp drop in oil prices, and finally 3) foreign portfolio inflows, which represent the most volatile source of foreign currency, is at risk due to a global retraction of funds. These risks make us believe that the CBE would opt to hold rates unchanged in order to preserve investor appetite for treasury instruments and avoid higher yields or a lower demand on these instruments.