In brief
- As widely expected, the Central Bank of Egypt (CBE) maintained its benchmark overnight deposit rate at 18.25% in its May 2023 Monetary Policy Committee (MPC) meeting held last week.
- Base effects led to a softening in April 2023 inflation to 30.6% (March 2023: 32.7%). Core inflation also decelerated to 38.6% from 39.5% in March 2023; elevated food inflation more than offset by the downward sticky retail and services items.
- Price pressure on notable commodities has eased off materially. Wheat price (-23.6% YTD) and ample wheat reserves (4.9months) implies positive knock-on to food items, and ultimately core inflation. Slower growth also suggests some weak inflationary demand in the economy.
- Nonetheless, the unresolved FX availability to the real sector risks unleashing upside inflationary pressure, in our view. Gleaning the latest balance of payments report (4Q2022) leaves us with the sense that the current account surplus (USD 1.4bn) was on the back of FX restrictions, rather than organic forces
- Although the on-the-run risk-on sentiment by offshore investors is laudable, sudden portfolio outflows could further destabilize the EGP in a material risk-off environment. In our view, this risk is amplified by the slow pace of IMF programme reforms, specifically targeting the sale of State-Owned Entities.
- Furthermore, the three main credit rating agencies have recently announced adverse credit actions on Egypt which may further spook investors and exacerbate portfolio outflows.
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