Household sector's trend towards deposits of three-year term or more ongoing since 2018

Weighted return on new deposits declines in September 2019 to 11.5%, 16% on loans

The Central Bank of Egypt (CBE) has revealed the continuation of the household sector's trend towards deposits for terms of three years or more since May 2018. Previously, the trend was towards terms of less than three years. This comes as a result of the high returns of saving certificates for a year and half compared to the returns of savings certificates for three years or more.
In a recent report, the CBE explained that this shift in the structure of deposits came in line with the redemptions for these certificates since May 2018, following the cancellation of new subscriptions in public sector banks since late April 2018.
According to the CBE, the household sector accounts for about 81.6% of total deposits in banks. The share of this sector is 84.4% of the total deposits in local currency, and 69.5% of the total deposits in foreign currencies.
The bank also revealed that the dollarisation rate continued to decline as a percentage of total deposits during the third quarter (Q3) of 2019, while the annual growth rate of deposits in foreign currency decreased during the same period for the second consecutive quarter, after witnessing an increase in mid-2018.
The growth rate in total bank deposits reached 13.01% in November 2019, compared to 12.8% in October, according to the CBE.
It explained that the rate of growth in deposits in local currency rose to 20.1%, compared to 19.5% in May, while the rate of growth in deposits in foreign currencies continued to reach -10.1%, compared to – 8.9%.
The share of foreign currencies in total deposits in banks declined to 18.62% at the end of November 2019, compared to 19% at the end of October.
In a related context, the CBE said that September 2019 witnessed a partial transition to reduce the CBE's basic interest ratio by 150 basis points on 22 August 2019, to the new deposits' weighted interest rate, which fell to 11.5%, by 0.4 times.
While interest rates on deposits with variable returns decreased, interest rates generally settled on savings certificates with fixed returns for periods of three years or more.
At the same time, the weighted interest rate on new loans decreased to 16% in September 2019, by 0.8 times the reduction in the CBE's basic interest rates on 22 August 2019. This shows that there is a slight contraction in the difference between loan interest rates and deposits to 4.5 percentage points, which is slightly lower than the long term average.
The CBE pointed to the continued restriction in real monetary conditions as a result of the easing inflationary pressures and previous increases in its basic rates of return, despite the cumulative decrease of 550 basis points during Q1 2018 and 2019, as well as Q3 2019.
According to the CBE, liquidity surplus increased in October 2019, following its decrease during the Q3 2019.
It explained that liquidity surplus recorded an average of EGP 749.5bn, equivalent to 13.2% of GDP, at the end of October 2019, compared to EGP 701.7bn, equivalent to 12.7% of GDP at the end of September 2019.
At the same time, the activity in the inter-bank cash market has remained relatively stable since April 2018, and the returns of inter-bank cash transactions below the base rate of the bank have remained at about 40 basis points since July 2019, compared to 30 basis points on average in the long term, supported by a decrease in the accommodation of excess liquidity in the long term.
The CBE said the yield curve's level in the inter-bank cash market decreased due to the total reduction of the CBE's basic rates of return by 250 basis points on 22 August and 26 September 2019.
It pointed out that the returns on government securities in local currency decreased to record a weighted return rate after tax deduction of 12.3% in October 2019, the lowest level since July 2016.
This comes compared to an average of 13.9% in Q2 2019, before the CBE lowered basic rates of return in August and September.
The CBE attributed the decrease in the weighted return of government securities by 1.5 percentage points to the decrease in demand on those securities, which appeared in the decrease in the coverage rate of bidding for these securities to record 1.7 times during October 2019 compared to 1.8 and 1.9 times in Q2 and Q3 2019, respectively.
In a related context, the CBE pointed out that after the rise in the yield on Egyptian international bonds during 2018, the return on them decreased since the beginning of 2019, before its recent stabilisation. This came in line with recent developments in emerging markets.
The CBE said that the sovereign credit swap margin for Egypt remained relatively low compared to the majority of countries with similar sovereign credit ratings to Egypt. It noted that Moody's and Fitch raised the sovereign credit rating for Egypt in both March and April 2019, after S&P raised Egypt's sovereign credit rating in May 2018.
Recently, Moody's and Fitch have maintained Egypt's sovereign credit rating while keeping a stable outlook.
In a related context, the bank said that the Monetary Policy Committee (MPC)'s decision to reduce its basic rates of return by 250 basis points in its meetings in August and September 2019 provides appropriate support for economic activity, and remains consistent with achieving the target inflation rate of 9 ± 3% during Q3 2020 and price stability in the medium term.
The bank expected that structural reforms in the Egyptian economy will continue to support a real GDP growth rate.
At the same time, it is intended to continue achieving the surpluses of the state's general budget, which amounted to 2.0% of GDP during the fiscal year (FY) 2018/2019, in the coming years to reduce debt levels.
According to the CBE, it is also targeted to continue decreasing the total deficit of the state's general budget to 7.2% and 6.2% of the GDP during the fiscal FY2019/2020 and FY 2020/2021, respectively, and to continue decreasing the total deficit after that.
On a global level, the CBE said that the slowdown in the global economy's growth rate will continue, alongside with the facilitation of global financial conditions, as well as the impact of risks associated with global trade policies on growth prospects.
At the same time, expectations for Brent crude prices included in the outlook for domestic inflation remained stable, and despite this, global oil prices are still subject to fluctuations due to potential supply factors that include regional risks.
On the other hand, the CBE expected the international prices of basic food commodities to rise by the same weights of the domestic consumption basket during 2020 and 2021.
It pointed out that, since prices of some oil products can cover costs, the international prices of oil may be reflected in local inflation, through the application of an automatic pricing mechanism in the prices of oil products.
At the same time, the purchase of hedging contracts against oil price fluctuations is expected to limit the impact of international oil prices on the state budget, while the impact of high oil product prices will be positive on the oil trade balance that achieved a surplus during FY 2018/2019 for the first time since FY 2012/2013.
The CBE pointed out that, in addition to the development of international commodity prices, the development in economic activity and trade policy tensions constitute the most important risks surrounding domestic inflation on the part of the global economy.