Macro Analysis /
Egypt

Egypt Inflation Monitor: March inflation decelerates, rates to be maintained

  • Inflation slows down as transportation prices fell mom and food prices fell yoy

  • Inflation driven by its heaviest constituents – food and utilities

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

Al Ahly Pharos Securities Brokerage
14 April 2020

Inflation slows down as transportation prices fall mom and food prices fall yoy

Inflation in March 2020 fell to 4.6% yoy for total Egypt, from 4.9% yoy in February, continuing a 4-month decline. This came very close to our expectations of 0.5% mom and 4.5% yoy. The deceleration was supported by a price decline in the transportation category as well as a mild price growth in food & beverages, despite a price hike in the tobacco category following the imposition of new tobacco taxes on 26 February. 

Inflation driven by its heaviest constituents: food and utilities

On an annual and monthly level, March inflation was driven by non-food items. For four months now inflation have been less and less impacted by volatile items such as food and fruits & vegetables. 

Headline & Core decline yoy and rise mom; driven by regulated items

Excluding volatile items from March’s headline inflation such as Regulated Items and fruits & vegetables, the core inflation for March rose to 1.9% yoy and 0.4% mom, compared to 1.8% yoy and 0.2% mom in February. 

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

Inflation for total Egypt in March came very close to our expectations of 0.5% MoM and 4.5% YoY. Hence, inflation is forecasted to hit 4.8% YoY and 0.5% MoM in April 2020, then fluctuate within 4.5-5.5% YoY during 2020 before picking up again to 6-7% 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 5.2% YoY and end CY2020 at an average of 5.4% 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 14 May

The CBE cut interest rates by 300 bps in an emergency meeting in early March, in an effort to protect the economy from the Coronavirus global blowout. As the situation persists, we expect the CBE to hold on to interest rates to assess the impact of the cut and the stimulus packages, before deciding whether more cuts are needed. Hence, despite inflation deceleration in March, 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 with major exits from all EMs. Egypt’s 3 major foreign currency sources are facing pressure: 1) Tourism revenues hindered by border lockdowns; 2) Remittances of Egyptians working abroad (mostly in the GCC) facing an economic slowdown in gulf economies as a response to the sharp drop in oil prices, and finally 3) foreign portfolio inflows, are being repatriated in a wave of global retraction of funds and the search for safe havens for investments.

Additionally, the CBE has used USD5.4bn of its Net Foreign Reserves to cater for portfolio outflows through the repatriation mechanism and have accepted very little bids for treasury bills in February and March to avoid accepting the higher yields demanded by investors. These two move would suggest that the CBE would not resort to further rate cuts to support outflows as lower reserves, lower supply of treasury and potentially lower net foreign assets would take the hit instead.As the Coronavirus keeps weighting on the economy, we expect the CBE to hold interest rates to assess the impact of the previous 300bps cut and the stimulus packages, before deciding whether more cuts are needed.