Expectations of rising flows of Egyptian debt instruments after listing them in global indices


Expectations of rising flows of Egyptian debt instruments after listing them in global indices

Monday – 4 Dhul Qi’dah 1442 AH – 14 June 2021 AD Issue No. [

Cairo: «Middle East»

The Research Department of HC Securities and Investment issued its expectations regarding the possible decision of the Monetary Policy Committee in light of the current situation in Egypt, as it expected that the Central Bank of Egypt would keep the interest rate unchanged at its meeting scheduled for next Thursday.
“The May inflation figures came in slightly better than our estimates at 5.0% y/y and 0.8% m/m,” said Monette Doss, senior macroeconomic and financial services analyst at HC. Over the remainder of 2021, we expect inflation to average 0.8 percent month-on-month and 6.8 percent year-on-year, reflecting higher commodity prices globally and the potential for a recovery in the tourism sector and consumer spending following the launch of the COVID vaccine. – 19. Therefore, we expect the inflation rate in 2021 to remain within the CBE’s target range of 7 percent (+/- 2 percent) for the fourth quarter of 2022, given the slowdown in tourism revenues.
She added, “Currently, Egypt relies on foreign capital inflows in the government debt market as a major source of foreign currency, which puts pressure on interest rates on government debt. This is evident in the decrease in the prices of treasury bills by only 129 basis points since January 2020, despite the fact that the Central Bank of Egypt reduced the interest rate by 400 basis points during that period, which led to the separation between the interest rate and the returns on treasury bills.
She explained, that at present, banks earn an average of 10.6 percent after tax on 12-month treasury bills and about 10.8 percent on lending to the private sector (according to the loan initiatives supported by the Central Bank of Egypt for different sectors at 8 percent, with participating banks compensated Official average interest rate difference + 2 percent), “We believe that at this point the interest rate cut may increase the difference between the official interest rate and government treasury bill yields, which we expect to remain high.”
Doss indicated that during the past three months, the flows of foreign portfolios in the Egyptian debt instruments market remained largely stagnant with the announcement of balances of 28-29 billion dollars in May, the same number that was announced for the month of February, and that The net foreign assets of the banking sector (excluding the Central Bank) have fallen to $3.52 billion, “which we believe is a weak level given that Egyptian banks are the main financiers in the event of a foreign investment exit. Therefore, we expect the Monetary Policy Committee to keep interest rates unchanged at its next meeting.”
Accordingly, it expected, “It is possible to reduce the interest rate by 100 basis points in the second half of 2021 after the resumption of tourism activity and a possible recovery in international trade. The potential high flows into the Egyptian debt instruments market after its inclusion in the series of government bond indices in the emerging and frontier markets FTSE and the “G.I. B. Morgan’s emerging market government bond could clear the way for the Monetary Policy Committee to make a rate cut. However, we believe that Egyptian treasury bills yield a real yield of about 4 percent according to our calculations (13.3 percent on 12-month Egyptian Treasury bills and accounting for the 15 percent tax on Treasury bills levied on US and European investors and our inflation forecast at 7.3 percent). Compared to the real return of 3.1 percent for Turkey (taking into account zero percent taxes and Bloomberg forecasts of Turkish inflation at 15.6 percent and 18.7 percent on one-year treasury bills).”
It is worth noting that the Monetary Policy Committee of the Central Bank of Egypt kept the interest rate unchanged at its last meeting for the fourth time in a row, after its decision to cut 50 basis points twice in the October and November 2020 meetings. The annual Egyptian inflation escalated to reach 4.8 percent in May, with monthly inflation achieving a rise of 0.7 percent, compared to an increase of 0.9 percent in April, according to data published by the Central Agency for Public Mobilization and Statistics.


Egypt’s economy


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