On Thursday, 12 November, the Central Bank of Egypt’s Monetary Policy Committee (MPC) meets to decide on the direction of interest rates. In its last meeting, around six weeks ago, the MPC unexpectedly cut interest rates by 50 basis points down to 8.75 per cent for the overnight deposit rate, 9.75 per cent for the lending rate, and a similar rate for the CBE’s main operation and discount rates.
Some economists support the idea that the MPC could cut interest rates to boost economic growth through lowering the cost of the private sector acquiring credit, especially that a new Covid-19 wave, with its repercussions of economic slowdown, is imminent.
Egypt’s economic growth is expected to record 3.3 per cent in the current fiscal year 2020/2021, down from 3.5 per cent in FY2019/2020, according to Fitch Solutions. In its monthly roundup, Fitch pointed out that weak prospects for a rebound in key sources of revenue such as tourism and remittances will put the brakes on growth.
Meanwhile, a handful of observers believe the CBE has room to manoeuvre another rate cut, ruling out the risk of outflows from pound denominated debt held by foreigners.
Egypt offers investors in its Egyptian pound denominated sovereigns one of the highest yields among emerging markets. No wonder that foreign holdings of Egyptian debt more than doubled to $2.1 billion between May and mid-October, signalling increased appetite for risky emerging markets assets and improving confidence in the Egyptian economy. Accordingly, the pound gained almost three per cent since June and is expected to remain stable till the end of the year.
However, others warned that while cutting interest rates works in favour of the government because it means a lower cost of debt, they urged the CBE to keep rates unchanged to prevent the risk of investors dumping domestic debt.
Moreover, they warned of how lower interest rates would affect a large segment of society that depends on yields on savings instruments, such as deposit certificates, for an income. The CBE lowered interest rates by 3.5 per cent so far this year and last month cancelled 15 per cent-yielding certificates of deposits.
The MPC bases its decisions on two main factors: inflation rates and the rate of GDP growth. When both are low, the MPC cuts rates to stimulate the economy. The CBE, as well as a number of investment banks, expects inflation to fall on the lower end of its 6-12 per cent target range in the fourth quarter of 2020 due to weak demand.
Annual urban inflation inched up to 4.5 per cent in October, compared to 3.7 in September and 3.5 in August, its lowest level since 2005. A sharp drop in inflation figures could result in consultations with the IMF, which would most probably result in more interest rate cuts. Under the $5.2 billion stand-by facility Egypt finalised with the IMF earlier this year, the government should have consulted with the IMF executive board when the inflation rate dipped below four per cent in September.
Meanwhile, the most recent news on the economy is positive. The American rating agency Standard and Poor’s (S&P) recently affirmed Egypt’s B sovereign credit rating with a stable outlook, despite the risks related to Covid-19. “The weakening of external and government debt metrics will be temporary, and gradually improve from 2022, supported by higher GDP and current account receipts (CARs),” S&P said.
Egypt’s foreign currency reserves and access to debt markets are expected to cover financing needs and upcoming maturities for the coming 12 months, the rating agency added. Egypt’s foreign reserves stood at $39.22 billion in October buoyed by a $5 billion Eurobond sale and a $750 million green bond offering, and $8 billion in IMF support. This is a blessing given that the fallout from Covid-19 will mean lower tourism revenues and lower remittances, two main hard currency earners for Egypt. S&P forecasts receipts to improve by 2022.
*A version of this article appears in print in the 12 November, 2020 edition of Al-Ahram Weekly