US dollar against EGP to be mildly more flexible, and to stay within the EGP 16.5 per US dollar until 3Q 2020, Bank of America Merrill Lynch (BoAML) said in a research note.
BoAML’s MENA economist Jean-Michel Saliba forecasts that T-Bill carry is likely to remain high enough and foreign currency reserves are still high.
The research note explained that the Central Bank of Egypt’s (CBE) comments on potential EGP volatility are to be interpreted as preparation to medium-term normalisation of the foreign exchange regime.
Additionally, the note cites that Egyptian authorities have approached the International Monetary Fund (IMF) for a new programme, however, BoAML expects that such IMF engagement is likely to be in a non-lending capacity.
With regards to T-Bills, the note indicates reform momentum and social stability are key to facilitating T-Bill rollovers – reinvesting funds from T-Bills that has reached its maturity term into a new issue – citing that Egypt’s macro stabilisation has succeeded.
Also, Egypt’s net international reserves (NIRs) stood at $45.1bn in September (7.3 months of trailing import coverage), up from $17.5bn in June 2016, the note explained, adding that the CBE holds an additional $6.72bn in deposits not reported in reserves.
As of August, foreigners held $15.bn of T-Bills, after $10.8bn of outflows in 2018, with interest in extending the duration. Foreign holdings represent 20% of the outstanding T-bill stock and 32% of NIRs, including deposits not included in reserves.
While fore Egypt’s monetary conditions, the note cites the decline in headline inflation to 4.8% y-o-y in September, dropping from 14.1% y-o-y in May. Thus, BoAML forecasts that the CBE is likely to cut policy rates further in 4Q19, under the conditions that real rates to remain high in an EM context.
Moreover, the note indicated that the FY20 budget is key to anchor debt dynamics, especially that the target to bring the primary surplus to 2% of GDP in FY19 was met. “Future budgets will likely target keeping the primary surplus flat, with headline consolidation coming from lower interest rates,” it said.
However, the research note warns that a financing gap, reform slippage due to the socio-political backdrop or a hasty IMF programme exit, a reversal of portfolio flows, high inflation, loss of competitiveness, political instability, eroding real effective exchange rate (REER) competitiveness, and security issues are the main risks.