In light of Egypt’s macro economy developments and the geopolitical conditions, HC Securities & Investment expects the CBE to cut interest rates by 150 bps at its upcoming April 17, 2025 meeting.
Financials analyst and economist at HC, Heba Monir commented: “ Egypt’s external position witnessed a mixed performance with (1) the banking sector’s net foreign asset (NFA) position widening by USD1.48bn m-o-m to USD10.2bn in February from USD8.71bn in January, reversing a net foreign liability (NFL) position of USD22.0bn a year earlier, on narrowing mainly the banking sector’s NFL position (excluding the CBE) by USD1.38bn m-o-m, reflecting lower pressures on foreign currency liquidity, (2) net international reserves (NIR) increasing by USD363m m-o-m in March to USD47.757bn from USD47.394bn in February, mainly due to a c6% m-o-m noticeable increase in gold, and deposits not included in official reserves also increasing by USD398m m-o-m to USD11.065bn in March, and (3) Egypt 1-year CDs hiking to 525 bps in April from 379 bps as of December, negatively impacted by the global economic turmoil from the US tariffs and its implications on foreign portfolio investment outflows, which in its turn impacted Egypt’s FX rate. Foreign investors sold USD1.04bn worth of treasuries in the secondary market since the beginning of this week and as of Tuesday, and the daily interbank volume jumped to USD1.12bn on Sunday from its daily average at USD150-250m, retreating to USD700m on Monday, USD300m on Tuesday and increasing again to USD955m yesterday. Domestically, real GDP grew by 4.30% y-o-y and 0.2% q-o-q in 2Q24/25 from enhanced exports. The PMI index fluctuated, retreating slightly below the 50.0 neutral mark to 49.2 in March, mainly from a weakening in the new orders after it exceeded the 50.0 mark in January and February on an easing in the inflationary pressures with improved consumer spending. Regarding inflation, March’s reading came higher than our estimate of 12.4% and higher than the Reuters consensus median estimate of 12.6%, which we attribute to higher-than-expected food and beverage prices due to seasonality, with Ramadan occurring in March. As for the T-bills auctions, yields are fluctuating, with the latest 12M T-bills auction of 24.95% reflecting a positive yield of 9.42% on the 12M inflation estimate of 11.8% (after deducting a 15% tax rate for European and US investors). The estimated average required rate of return by foreign investors on 12M T-bills is also declining to 28.0% from 29.3% in mid-February, based on our calculations, considering a lower inflation differential and the recent hike in Egypt’s 1-year CDs, close to the average interest rate on 3M T-bills of 28.24%, given the current inverted yield curve, as shown in the chart below (3M T-bills higher than 12M T-bills). From the above, we conclude that the Egyptian economy was able to contain the inflationary pressures (albeit still above the CBE’s targets; however, on a downward trend mainly due to base effect), our carry trade is still attractive, and there is a noticeable improvement in the NFA position of the banking sector, allowing the smooth recent exit of some foreign investors from our treasuries market. Therefore, we expect the MPC to cut interest rates by 150 bps at its upcoming 17 April meeting, mainly to stimulate local economic growth, considering global recessionary fears.”
It is worth mentioning that, in its 20 February meeting, the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) maintained the benchmark overnight deposit and lending rates unchanged at 27.25% and 28.25%, respectively, for the seventh consecutive times, after it hiked them by 600 bps in March 2024, bringing total rate hikes to 1,900 bps since it started its tightening policy in 2022. Egypt’s annual headline inflation accelerated to 13.6% y-o-y in March from 12.8% y-o-y in February, according to the Central Agency for Public Mobilization and Statistics (CAPMAS) data. Monthly prices rose 1.6% m-o-m compared to a 1.4% m-o-m increase in February. On the global front, on 19 March, the U.S. Federal Reserve maintained the target range for the federal funds rate at 4.25-4.50%, leaving the total cuts at 100 bps after it hiked rates by 525 bps since it started tightening policy in 2022, while the European Central Bank (ECB) lowered the key ECB interest rates for the deposit facility, the main refinancing operations and the marginal lending facility by 25 bps on 6 March to 2.50%, 2.65% and 2.90%, respectively, bringing total cuts to 150 bps, since it started cutting rates in June 2024 after it hiked rates by 450 bps since it started its tightening policy in 2022.
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