INTERVIEW: EGP appreciation to bring down Egypt’s inflation to below 30% by June: UK-based Standard Chartered Economist

Doaa A.Moneim , Friday 31 May 2024

​The UK-based multinational Standard Chartered Bank, which officially initiated its banking operations in Egypt in January, organised a roundtable in Cairo this week to showcase its insights on the Egyptian economy in light of the ongoing regional tensions.

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During the event, the bank’s economists Carla Slim and Philippe Dauba-Pantanacce said the Egyptian economy has a variety of sectors that boost its economic growth with a significant investment plan in renewable energy.

Ahram Online interviewed Carla Slim, the Economist at Standard Chartered for the Middle East and Pakistan, on the sidelines of the event to discuss with her the latest developments the country has experienced on the macroeconomic level and how the bank perceives them.

Ahram Online: How does Standard Chartered Bank perceive the recent economic developments in Egypt, particularly the FX rate unification and the interest rates hike?

Carla Slim: Egypt has the largest population in the Middle East and North Africa (MENA) and the 14th-largest globally; it is the region’s third-largest economy, with a diverse range of sectors – including gas, trade, tourism, industry, and minerals – and significant planned investment in renewable energy. FX constraints will generally probably remain a hurdle to economic activity in 2024.

We see Egypt’s growth slowdown bottoming out at 3.8 percent, followed by a recovery to trend growth of 4.5 percent. Last month’s CPI release (32.5 percent y-o-y, 1.1 percent m-o-m) supports our view that Egypt is past its inflation peak (38 percent y/y in September). Despite increases in local transport prices and utility bills since the start of the year, EGP appreciation and base effects have led to an entrenched disinflation trend. We see the consumer price index (CPI) easing below 30 percent by June 2024 and below 20 percent by January 2025 – pushing real rates back into positive territory by the summer.

However, we raise our average CPI forecast to 33.7 percent y-o-y from 30 percent for the current FY2023/2024 (ends 30 June 2024), as food inflation, in particular, has proven more stubborn than we had envisaged, only easing to 40.5 percent y-o-y in April from 74 percent in September. With this forecast revision, our cumulative three-year inflation projection (FY2022/2023-FY2024/2025) crosses 70 percent, indicating significant cost-of-living pressure. As such, we think monetary policy easing at May’s Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) meeting would be premature, despite positive signs from recent inflation prints.

We expected the CBE to maintain the key interest rates in its last meeting on 23 May, although we expect the CBE to embark on an easing cycle as soon as the first quarter (Q1) of the upcoming FY2024/2025 (on July or September meetings). In the meantime, the policy focus has shifted to liquidity management tools to support disinflation further and improve monetary policy transmission.

 

AO: From your perspective, in which ways does Egypt need to adopt sustainable foreign exchange (FX) liquidity in the market?

CS: As previously mentioned, FX constraints will likely remain a hurdle to economic activity this year. In 2024, we do not rule out potential fresh GCC deposits placed with the CBE, over and above rollovers of existing deposits. So far, Egypt has received $20 billion of the second tranche of the Ras El-Hekma deal, $14 billion of which was fresh funds and the rest was conversion of UAE deposits. Egypt plans to use the FX liquidity to clear external dues and transfer 50 percent to the treasury to reduce budget financing needs. It is also in talks with the IMF for $1.2 billion from the Sustainability and Resilience Facility announced in the initial Staff Level Agreement (SLA). As such, we expect lower domestic bills and bond issuance, as the Abu Dhabi disbursement should meet government financing needs. As for our near-term view, we remain overweight, given the strong support underpinning the Egypt curve, but medium-term debt sustainability challenges remain.

 

AO: What is the Bank’s estimation for Egypt’s financing needs in the coming FY2024/2025 that starts on 1 July?

CS: Debt sustainability continues to be a concern as debt-servicing challenges increase in 2024, due to widening twin deficits and external debt repayments totalling $29 billion. We have revised our fiscal deficit forecast for FY2023/2024 to 10.5 percent of GDP, up from the previous estimate of seven percent, driven by rising interest costs. Additionally, we have adjusted our current account deficit forecast for FY2023/2024 to 3.5 percent of GDP, up from two percent.

 

AO: What are the key risks Egypt may face on the economic level in the coming fiscal year?

CS: The risks to the economic level that might affect the coming fiscal year are rising worldwide, and no country is immune.

For Egypt, we see two key risks to macro stability in the near-to-medium term: reining in inflation and ensuring consistency of inflows. First, February CPI inflation surprised sharply on the upside (35.7 percent y-o-y vs our 25.9 percent projection and consensus 25.1 percent), driven largely by food inflation (51 percent y-o-y). Second, we are optimistic that portfolio inflows will return after the positive confidence shock. However, we now expect another 300bps of rate hikes and raise our end-FY24 policy rate forecast to 30.25 percent (19.25 percent prior; the year ends June 2024).

This is because further tightening may be warranted to pull real rates into positive territory to make a more compelling case for the return of the carry trade.

Consistency of FX inflows will be key to ensuring that Egypt’s net foreign liability (NFL) position narrows and USD-EGP stabilises; we revise our end-2024 USD-EGP forecast to 45 (31 prior).

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