After Record Rate Cut, Egypt May Pause to Defend Against Selloff

CAIRO (Capital Markets in Africa) — After making its biggest-ever interest-rate cut, Egypt is likely to hold fire Thursday as it tries to ringfence its debt from an emerging-market selloff sparked by the coronavirus.

While central bank Governor Tarek Amer has said there’s scope for another reduction if needed, nine of 10 economists surveyed by Bloomberg predicted the Monetary Policy Committee will maintain the key deposit rate at 9.25%. One analyst sees a cut to 8.25%. It slashed rates by 300 basis points in an emergency decision on March 16, calling it “appropriate support to domestic economic activity.”

Egypt, which has reported 779 cases of the virus including 52 deaths, is seeking to avoid the battering taken by much of the emerging world. While investors pulled a record $83.3 billion from developing-nation equity and debt markets in March, Egypt’s pound has proven extremely resilient, notching the second-best performance globally against the dollar this year.

“Unless we see a spike in new daily cases, we expect relative policy stability in the short term,” said Ahmed Hafez, head of research for the Middle East and North Africa at Renaissance Capital.
Still, Egypt’s currency stability will be hard to maintain. The pound is up against the dollar this year but increasingly overvalued, according to investors.

The Arab world’s most populous country gets much of its foreign currency from three main sources: tourism, remittances and revenue from the Suez Canal, all of which are threatened by a combination of the virus and the oil-price crash.

What Our Economists Say…
“Additional rate cuts risk destabilizing the pound as portfolio investors withdraw from Egypt’s fixed-income market.”– Ziad Daoud

“The pressure from lower foreign-currency current account flows could lead to some weakness in the pound versus demand for imports,” said Reham El Desoki, an independent economist in Cairo. Egypt, which is typically a net oil importer, though, could see significant budget savings from the collapse in crude prices.

The North African country will also want to maintain its status as a darling for carry-trade investors. Even after last month’s rate cut, it offers one of the world’s highest real yields.
At the same time, Egypt has managed to tame inflation that rocketed to over 30% during an International Monetary Fund-backed reform program — in February the rate was 5.3%.

The virus’s impact could go either way, Goldman Sachs Group Inc said this week. While a decline in economic activity would further depress demand, any hoarding or product scarcity caused by disruptions to the supply chain could spur price rises.

Source: Bloomberg Business News