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Rare rate reduction
Published in Al-Ahram Weekly on 22 - 02 - 2018

Thanks to a decline in inflation rates, the Central Bank of Egypt (CBE) this week cut interest rates by one per cent, the first time it had done so since the floatation of the Egyptian pound in November 2016.
The overnight deposit rate now stands at 17.75 per cent, down from 18.75 per cent, and the overnight lending rate is 18.75 per cent, down from 19.75 per cent. A statement issued by the CBE cited lower inflationary pressures as the reason behind the move.
Annual headline inflation rates declined for the sixth consecutive month in January 2018 to 17.1 per cent, their lowest level in more than a year after peaking in July 2017 at 33 per cent in the wake of energy subsidy cuts. The CBE's monetary policy committee (MPC) made specific mention of negative month-on-month inflation over the past two months, coming in at -0.19 per cent in December and -0.08 per cent in January, in justifying the move.
It was expected by most analysts, especially after CBE Governor Tarek Amer stated in a conference in Cairo last week that the bank planned to start easing monetary policy “soon”.
“This cut remains consistent with tight real monetary conditions, and is a necessary requirement to achieve the inflation target of 13 per cent in the fourth quarter of this year and single digits thereafter,” Amer said.
Since the floatation of the pound in November 2016, the CBE had raised overnight rates by seven per cent to combat inflation.
The current move should reduce the budget deficit by 0.15 per cent in 2017/2018, financial house Prime Securities said. “The government has allocated LE381 billion for interest payments in 2017/2018, which represents 32 per cent of overall expenditures. The drop in interest rates by one per cent will reduce these payments by LE9 billion,” it said.
If the MPC introduces further decreases at its May and June meetings, this should save LE7 billion and LE3 billion, respectively, from interest payments and thus reduce payments across the year to LE370 billion, according to Prime analysts.
Analysts also predict that the move will encourage private investments now that the cost of borrowing is less, and this will eventually push up growth rates.
The economy has been suffering since the 25 January Revolution in 2011, when political and economic instability ate up much of the country's foreign reserves. However, economic stimulus packages together with the economic reforms tied to a three-year International Monetary Fund (IMF) deal signed in 2016 have led to positive economic indicators.
The economic growth rate continued to improve for the fifth consecutive quarter to record 5.3 per cent in December 2017, its highest since 2010, according to the CBE. The pick-up in economic activity coincided with the continued narrowing of the unemployment rate to 11.3 per cent in December, the lowest since December 2010.
The declines in both the inflation and unemployment rates mean Egypt has improved its position on US investment firm Bloomberg's Misery Index from the second-most miserable country last year to the fourth this year.
The index, “which sums inflation and unemployment outlooks for 66 economies,” says that “rising prices are more of a threat to the global economy this year than joblessness.”
There are reasons to think that inflation will continue to ease over the coming years, according to financial house Capital Economics. “After several years of sluggish growth, there is probably some spare capacity in the economy which will keep the lid on underlying price pressures. Meanwhile, the Central Bank has stopped monetising the budget deficit,” a statement noted.
According to Arqaam Capital, an investment house, “with inflation coming down, the MPC should have further room to cut rates by one more per cent in March.”
“This would be the last window for the MPC to cut rates before the summer, and we expect rates to be held stable during the May and June MPC meetings ahead of the planned subsidy reforms in June/July,” it said.
“The following window to ease rates again would be in August, where we expect rates to come down by two per cent,” the Arqaam Capital statement said.
SELLING LIKE HOT CAKES: Egypt's $4 billion Eurobond issue was snatched up by international investors and closed at three times oversubscribed this week, when some 550 investors from around the world, with an unexpected increase in demand from Middle Eastern and Asian funds, put in buying orders worth more than $12 billion.
The demand is seen as a sign of increasing confidence in Egypt's economy. “It's excellent news, and Egypt has effectively re-opened the window for emerging market bond issues despite the recent turmoil in global markets,” Finance Minister Amr Al-Garhi told the daily business newsletter Enterprise.
The offering included three tranches: $1.25 billion of five-year notes bearing a yield of 5.58 per cent; $1.25 billion in 10-year notes with a yield of 6.59 per cent; and $1.5 billion in 30-year notes with a yield of 7.91 per cent. Analysts say the pricing is good in the light of the recent market turmoil and the expected increase in US interest rates.
Ahmed Kouchouk, the deputy minister of finance, told Enterprise that Egypt was the first emerging market to close a Eurobond offering since before the sell-off in the international markets, adding that there were a number of other emerging markets, including Indonesia, that had postponed or called off offerings in view of the global climate.
The Finance Ministry is planning to start talks with European banks in February to issue euro-denominated Eurobonds. The issue will be worth one to 1.5 billion euros and will be offered next April.

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