The capital flows into emerging markets (EM) have continued to recover following the sharp slump in March 2020, according to the Central Bank of Egypt (CBE).
The month witnessed the sharpest outflows on record since 2008, as a result of the outbreak of the novel coronavirus (COVID-19) pandemic.
The continued rollout and development of vaccines is expected to support global economic recovery. Coupled with the accommodative global financial conditions, this has supported the resumption of inflows into emerging market economies.
Globally, economic activity has embarked on its path to recovery in the first quarter (Q1) of 2021, with world trade continuing to recover as inflation accelerated the quarter.
International oil prices have continued to rise, registering the highest rate since April 2019. Capital inflows into emerging markets continued to increase between November 2020 and May 2021, supported by the accommodative global financial conditions and the continued rollout of vaccines.
Prospects for global economic recovery have gained more traction since the CBE’s previous Monetary Policy Report, as progress with vaccinations and the accommodative financial conditions continued to support economic activity.
However, the pace of economic recovery remains uneven across regions and economic sectors, as some countries are yet to contain the spread of the virus. Global growth weighted by Egypt’s external environment expanded by 1.3% in Q1 of 2021, after contracting by 2.5% in the preceding quarter.
The improved growth momentum reflected favourable base effects and was further boosted by economic recoveries in select advanced and emerging market economies.
More specifically, economic activity in advanced economies continued contracting for the fifth consecutive quarter in Q1 of 2021 by 1.3%, albeit at a softer pace than the 3.2% contraction registered in Q4 of 2020.
The easing of the contraction in advanced economies in Q1 of 2021 was driven by the positive growth rate recorded in the US. This was coupled with the softer broad-based contractions registered in the Eurozone and the UK.
In the meantime, emerging market economic activity expanded for the second consecutive quarter, recording 2.5% in Q1 of 2021 from 0.7% in Q4 of 2020.
The notable improvement in growth emanated from the expansion in economic activity exhibited by China, India and Brazil. All of the latter expansions more than offset the slight contraction in Russia’s economic activity.
Furthermore, global trade continued its path to recovery in Q1 of 2021, further cementing the positive growth rates registered since the preceding quarter.
This comes after growth in Q4 of 2020 marked the reversal of the negative trend present since Q2 of 2019. Specifically, global trade grew by 8.8% in Q1 of 2021 on an annual basis, from 2.6% in Q4 of 2020.
Annual headline inflation of Egypt’s external environment accelerated to 1.6% in Q1 of 2021 from 0.9% in Q4 of 2020, after having decelerated from 1.3% in Q3 of 2020. Inflation in advanced economies increased to 1.1% in Q1 of 2021 from 0.1% in Q4 of 2020, on the back of higher inflation registered in the US, the UK, and the Euro Area.
Combined, all of the latter offset the continued deflation in Japan. Similarly, inflation in emerging market economies rose to 3.4% in Q1 of 2021, relative to 2.9% in the preceding quarter.
The latter came largely on the back of accelerations in Brazil’s and Russia’s inflation, which more than offset the deceleration in India’s inflation and the slight deflation in China’s consumer prices witnessed during Q1 of 2021.
Brent crude oil prices have risen on average for eight consecutive months (except for April 2021) since October 2020, registering $74/barrel in the first half (H1) of June 2021, which is the highest recorded price level since April 2019.
This marks a significant increase from the trough of $18.4/barrel recorded in April 2020. The recent increases in February, March, and May were driven by both demand and supply side factors. In the meantime, international food prices using domestic CPI basket weights of core food items rose sharply on an annual basis since February 2021.
The latter increases were mostly driven by higher red meat, poultry, and vegetable oil prices.
The Federal Reserve has decided to maintain its policy rates at their current levels during its last meeting held in June 2021, after having cut rates by 150bps in March 2020.
It also decided that it will maintain the magnitude of its asset purchase programme. Nonetheless, the Federal Reserve signalled, in its latest outlook, that there is an increasing possibility of raising policy rates in 2022 (relative to the preceding outlook), a year earlier than previously forecasted. This comes mainly on the back of increased optimism about US economic recovery.
Similarly, the European Central Bank (ECB) also kept its main refinancing operations rate and deposit facility rates unchanged at 0% and negative 0.5% in its last meeting in June 2021, both of which were last changed in March 2016 and September 2019, respectively.
In addition, the ECB also pledged to increase the pace of its purchases under the pandemic emergency purchase programme over the coming quarter.
Moreover, the Bank of England also kept its main policy rates unchanged during their last meeting in June 2021 at 0.1%, after cutting it by 65 bps in March 2020. With regards to quantitative easing, it pledged to continue with its existing government bond purchases.
Real GDP growth at market prices picked up to 2.0% in Q4 of 2020 compared to 0.7% in the previous quarter, implying that growth for H1 of fiscal year (FY) 2020/21 recorded 1.3% on average.
Preliminary figures indicate that the witnessed improvement in GDP growth during Q4 of 2020 was primarily a result of the subsiding combined negative contributions of gross domestic investments and net exports, which halved in Q4 of 2020 compared to the previous quarter.
Meanwhile, the positive contribution of consumption continued to support economic activity, albeit to a lesser extent, offsetting the combined negative contributions of gross domestic investments and net exports.
From a different perspective, the subsiding negative contributions of public domestic demand and net exports contributed to the pickup in growth. Meanwhile, the positive contribution of private domestic demand stabilised compared to the previous quarter.
The negative contribution of net exports to GDP growth in Q4 of 2020 eased compared to the previous quarter, stemming mainly from the narrowing contraction of real exports, and to a lesser extent real imports.
Sectoral GDP growth registered an expansion of 0.4% in Q4 of 2020 following two consecutive contractionary quarters. This was on the back of an improvement in private sector GDP which reversed the contraction it witnessed in the previous quarter.
Private sector activity was supported by the easing contraction in tourism and non-petroleum manufacturing compared to the previous quarter.
Meanwhile, public sector contribution to sectoral GDP growth stagnated in Q4 of 2020 after recording a marginal positive contribution during the previous quarter. Public sector activity was dragged down by the negative contributions of petroleum manufacturing, oil extractions and natural gas extractions.
Regarding the labour market, the unemployment rate stabilized at 7.4% in Q1 of 2021 against 7.2% in Q4 of 2020, remaining broadly around its pre-COVID-19 level of 7.7%.
Moreover, both employment and the labour force dropped on a quarterly basis, after expanding for two consecutive quarters. Therefore, the broad stability in the unemployment rate came due to the quarterly decline in the labour force, which offset the quarterly decrease in employment.
A number of leading indicators continued to recover throughout Q1 of 2021, sustaining the gradual recovery momentum, which began following the easing of containment measures.
Furthermore, most leading indicators have already returned to their pre COVID-19 levels as of March 2021, although some of the improvement is attributed to the presence of a favourable base effect.
However, the Purchasing Managers Index (PMI) continued to contract for the sixth consecutive month in May 2021, although the pace of contraction softened in the latter month.
On the other hand, the manufacturing index expanded for the first time in a year, indicating a slight pickup in non-petroleum manufacturing, which is partially base-effect driven.
Additionally, annual growth in car sales increased significantly during Q1 of 2021 compared to the preceding quarter, which is also partially base-effect driven.
Furthermore, the Suez Canal net tonnage growth continued to recover during Q1 of 2021 and expanded strongly during April and May 2021 for the first time in a year, exceeding its pre-COVID-19 levels.
Similarly, some activity indicators within the hydrocarbon sector expanded strongly during Q1 of 2021, as natural gas production increased at an accelerating rate and LNG exports resumed.
Real monetary conditions are estimated to have broadly stabilised in Q2 of 2021, after easing since Q3 of 2020 supported by the cumulative 400 bps policy rate cuts in March 2020, September 2020, and November 2020.
Excess liquidity levels have been broadly decreasing since the maintenance period ending 8 February 2021, to record an average of EGP 486bn (1.3x the reserve requirement) during the maintenance period ending 14 June 2021.
This compared to an average of EGP 534bn (1.5x the reserve requirement) during the maintenance period ending 8 February 2021.
Meanwhile, the O/N interbank rate has been above the mid-corridor rate since July 2020, compared to its long-term average spread of around negative 30bps.
As of the maintenance period ending June 14, 2021, interbank rates continue to reflect a decline by about 0.7x the cumulative 400 bps policy rate cuts in March 2020, September 2020, and November 2020.
Yields for L/C government securities have been broadly stable, after slightly declining in December 2020, to record an average of 10.8% (net of tax) during April 2021, May 2021, and the first three auctions in June 2021.
This compares to 10.7% (net of tax) recorded on average during Q1 of 2021 and 11.6% (net of tax) recorded on average during December 2019, January 2020, and February 2020. This was prior to the cumulative 400 bps policy rate cut on 16 March 2020, 24 September 2020, and 12 November 2020.
The recent broad stability in the weighted average yield was supported by the slight increase in the supply which broadly offset the slight drop in demand.
The accepted-to- required ratio for L/C government securities rose slightly to record 1.1x on average during April 2021, May 2021 and the first three issuances in June 2021, compared to 1.0x recorded during Q1 of 2021.
Meanwhile, demand declined slightly, reflected by the overage ratio of 1.8x recorded on average during April 2021, May 2021, and the first three issuances in June 2021, compared to 2.0x recorded during Q1 of 2021.
Meanwhile, yields on Egyptian Eurobonds have been broadly declining since May 2021 after inching up during February and March 2021. This fell in line with the development in sentiment regarding emerging markets.
Moreover, Egypt’s CDS spreads remained relatively stable since February 2021 notwithstanding the recent increase in April 2021.
Furthermore, Egypt’s CDS spreads remained relatively low compared to the majority of peers with similar sovereign credit rating. Furthermore, Fitch Ratings and S&P have reaffirmed their current credit rating for Egypt while maintaining a ‘stable’ outlook in July 2020 and April 2020, respectively.
It is noteworthy to highlight that Egypt’s credit rating was upgraded by Moody’s and Fitch Ratings in April and March 2019, respectively, following the upgrade by S&P in May 2018.
In the banking sector, data until April 2021 continued to reflect partial transmission of the cumulative 400 bps policy rate cut on 16 March 2020, 24 September 2020, and 12 November 2020 to rates of new deposits.
New deposit rates declined to record 8.4% in April 2020, compared to an average of 9.5% recorded during December 2019, January 2020 and February 2020. This reflects a transmission in the magnitude of 0.3x the cumulative 400 bps policy rate cut on 16 March 2020, 24 September 2020, and 12 November 2020.
Meanwhile, rates of new loans declined to record 11.6% in April 2021, compared to an average of 10.7% during Q4 of 2020 and 15.1% on average over the months of December 2019, January 2020, and February 2020.
This reflects a transmission in the magnitude of 0.9x the cumulative 400 bps policy rate cut on 16 March 2020, 24 September 2020, and 12 November 2020. The decline was also supported by the CBE’s initiatives.