Egypt Economic Update – August 2024
• Economic growth. The IMF Executive Board's completion of the third review of Egypt's USD8bn, 46-month Extended Fund Facility on 29 July, allows Egypt to draw down a further USD820m in financial support. The disbursement takes the total received since the deal was first signed in December 2022 to USD2bn, with a further USD1.25bn available before year-end with the completion of the fourth review.
• Inflation. Egypt’s inflation declined for the fifth consecutive month in July, easing to 25.7% y/y from 27.5% y/y in June, marking the lowest rate in over a year. Going forward, the impact of subsidy cuts on inflation will be modest, with further deceleration expected, potentially returning to the CBE’s target range of 7% ± 2ppts by end-2025.
• Interest rates. The CBE next meets on 5 September and we expect it to lower the deposit and lending rates by 100bps to 26.25% and 27.25%, respectively. Our rationale is three-fold. First, policy rates are markedly above neutral on a forward-looking basis. Second, quantitative monetary tightening and fiscal tightening, both on and off balance sheet, should also help ease inflationary pressures, providing more space for rate cuts in the near term. Third, the outlook for capital inflows remains strong, including official inflows, FDI and remittances, which are less sensitive to local rates than portfolio flows.
• FX view. Following the devaluation of the Egyptian Pound (EGP) in March 2024, traders have benefitted by positioning long EGP against the US dollar (USD), to take advantage of a deep valuation buffer and elevated carry. This was also justified by favourable external financing and policy developments, including the UAE’s USD35bn investment, an increased IMF programme and 600bp of policy rate hikes, which contributed to bringing ex ante real rates into double digit territory. Since then, the trade recommendation has benefited from carry accumulation and from some degree of spot appreciation thanks to strong international demand for local T-bills following the devaluation and the confluence of positive developments on inflows.
