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Head of macro and financials at HC, Monette Doss commented: “Egypt's inflation remains closer to the lower end of the CBE target range of 7% (+/-2%) for 4Q22, and we expect it to average 5.6% in 4Q21. We believe that the Federal Reserve's recent announcement of unlikely interest rate hikes in the near future partly relieved the pressure on Egypt's treasury yields by renewing the interest in emerging markets carry trade. Accordingly, Egyptian treasury bill yields declined by an average of 40 bps since mid-August, reflecting higher foreign portfolio inflows during August. Foreign holding of Egyptian treasuries increased to USD33.0bn in August from USD29.0bn in May, according to S&P Global Ratings. We also believe that a rebound in foreign currency receipts from tourism following the resumption of Russian flights to Egypt's Red Sea resorts released some interest rate pressure on the EGP. Going forward, we believe that the interest rate action of other emerging markets will determine the pace of future declines in Egypt's treasury yields. Currently, Turkey offers c19% on its 1-year treasuries (hence a real yield of 5.45% given zero taxes and Bloomberg 2022 inflation estimate of 13.4%) compared to Egypt's real yield of 3.0% (given our 2022e inflation forecast of c8% and 15% taxes for European and US investors). Also. according to CBE data, the corporate borrowing rate is currently at around 9.4%, while the risk-free after-tax rate is around 10.4%. Therefore, we believe that any interest rate cuts at the moment could lead to a wider gap between the corporate and the risk-free rates, with the corporate rate being on the lower end. We accordingly expect the MPC to keep rates unchanged in its upcoming meeting.”
It is worth mentioning that, in its last meeting on 5 August, the Central Bank of Egypt's (CBE) Monetary Policy Committee (MPC) decided to keep rates unchanged for the sixth consecutive time. Egypt's annual headline inflation came in at 5.7% in August, with monthly inflation increasing 0.1% m-o-m compared to an increase of 0.9% m-o-m in July, according to data published by the Central Agency for Public Mobilization and Statistics (CAPMAS).
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About HC Securities:
HC Securities & Investment (HC) is a leading investment bank in Egypt and the MENA region. Since its inception in 1996, HC has utilized its relationship-driven insights, local and regional market knowledge, and industry-specific expertise and strong execution capabilities to provide its clients with a wide range of services in investment banking, asset management, securities brokerage, research, custody, online trading and private equity through its offices in Egypt and the UAE (DIFC). HC Investment Banking has an outstanding track record of advising leading corporates in Egypt and the MENA region on M&A, capital market, and financing transactions in excess of USD6.2bn. HC Asset Management, winner of the 2018 MENA Fund Manager Awards, now manages 9 mutual funds for commercial banks and portfolios for institutions and sovereign wealth funds with assets under management in excess of EGP6.8bn. HC Brokerage is ranked among the top brokers in Egypt and provides a wide array of services, including research and online trading to institutional and retail clients.
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