CI Capital expects the Egyptian pound to remain stable in fiscal year (FY) 2019/20, as they don’t see the liquidity release pressuring the Egyptian pound, as any short-lived volatilities can be funded through banks’ Non-Financial Advisory Services (NFAs) of up to $10bn, expecting the US dollar to average EGP 17.11 in the fiscal year (FY) 2020/21, in line with the pick-up.
They added that a stable exchange rate is essential to simulate the economic cycle without disturbing supply side factors, achieving non-inflationary growth in demand activity.
In terms of interest rates, CI Capital expects the CBE to keep policy rates on hold in its two upcoming meetings, scheduled for 14 November and 26 December, as the CBE would need to assess the impact and sensitivity of the recent rate cuts on overall activity, before proceeding with further monetary easing, as not to exhaust its liquidity instruments. The CBE also needs to maintain Egypt’s carry trade competitiveness in the EM debt market, as it currently offers a yield among 19 EMs, standing at 12.18%.
They added that the fiscal deficit would continue to narrow over the coming two years reaching 7.4% and 6.8% in FY 2019/20 and FY 2020/21, compared to 8.5% for FY 2018/19. The narrowing of the fiscal deficit is key, as not to cause any crowding out effect for the private sector.
The report forecasts Egypt’s budget to benefit from monetary easing, as falling interest rates cause the budget interest expense to drop.
The Ministry of Finance had projected an average interest rate on local debt of 15.5% in FY 2019/20, while the simple average interest rate is currently 15%. A 50bps cut saving EGP 5bn on interest expense, according to the Minister of Finance and CI’s Economists estimate, saves the budget interest expense EGP 6bn (0.3% of total expense) in FY 2019/20.