Egypt’s $10 Billion Funding Gap May Stall Rate Cuts for Now

CAIRO (Capital Markets in Africa) — Egypt’s funding needs will probably prove decisive for the central bank, ensuring a longer pause in interest rates after a record cut in March.

The focus at the moment is on bridging a financing gap that’s estimated at about $10 billion in 2020 by EFG Hermes and Goldman Sachs Group Inc. Elevated rates are an advantage at a time many emerging nations are looking to stave off outflows amid the global pandemic.

A pickup in inflation last month is all the more reason for the Monetary Policy Committee to maintain its key deposit rate at 9.25% on Thursday, as predicted by 11 of 14 economists surveyed by Bloomberg. The rest see a cut of 50 basis points to a full percentage point.

“We don’t expect the central bank will act on rates before covering the country’s funding gap unless there is a serious deterioration in the economic outlook in light of Covid-19,” said Mohamed Abu Basha, head of macroeconomic research at Cairo-based investment bank EFG Hermes. “They need to keep an eye on the still sizable positions in the carry trade.”

Caution by the central bank can help guard against a global selloff after Egypt already saw its biggest-ever capital outflows of about $17 billion in the past two months. While the economy is in distress after restrictions imposed to contain the virus outbreak, policymakers have said that a 300 basis-point rate cut at an emergency meeting in March provided “appropriate support” to domestic activity, a decision they followed with a hold in April.

What Our Economists Say…
“Egypt’s central bank will resist cutting interest rates because of concern about the risk of outflows. Rate cuts could lead to a new round of capital flight, further declines in international reserves and a dwindling of foreign assets at commercial banks.”– Ziad Daoud

Egypt’s finances are under strain as some of the country’s main sources of foreign currency, such as tourism, remittances, and Suez Canal receipts, come under pressure from disruptions in trade and travel. The North African nation this week received $2.8 billion from the International Monetary Fund under its emergency instrument. It’s now seeking more than $5 billion from the lender under a stand-by arrangement as well as $4 billion from other institutions, an official told Bloomberg.

Egypt’s net international reserves fell by almost a fifth to $37 billion over the past two months. They had reached an all-time high prior to the outbreak. The central bank partially covered the pullback of overseas portfolio capital through its repatriation mechanism, which guarantees investors can withdraw profits in hard currency.

With annual inflation accelerating in April for the first time in 2020, Egypt risks losing the higher rate buffer that endeared it to carry-trade investors. Goldman Sachs now sees price growth “rising steadily” to around 8% by the end of the year, from 5.9% in April, implying real rates of about 2% as long as the central bank refrains from a cut.

Adjusted for inflation, policy rates are now at 3.35%, near the lowest in a year but still well above many of Egypt’s peers among developing nations.

“While there is a chance of further cuts to stimulate economic activity, we believe upward supply-side pressure on prices resulting from supply-chain disruptions will likely see rates on hold for the foreseeable future,” Goldman economists including Farouk Soussa said in a note.

Source: Bloomberg Business News