IMF loan to stabilize Egypt’s economic situation : Fitch Solutions

Fitch Solutions believes that Egypt’s conclusion of an International Monetary Fund (IMF) loan agreement will help stabilize economic conditions in the near term.

They added in a report: Contrary to our expectations, the authorities proceeded with an immediate rather than a gradual weakening of the currency. Indeed, on October 27, the Central Bank of Egypt (CBE) held an unscheduled meeting of its Monetary Policy Committee (MPC) during which it raised its deposit and overnight lending rates by 200 basis points (bps) at 13.25% and 14.25%, respectively, and announced the introduction of a flexible exchange rate.

“While we had long maintained that the period of stable exchange rates in Egypt was behind us, we believed that the authorities would let this happen gradually to avoid an intensification of inflationary pressures and social discontent,” the report said.

However, the downside risk has materialized, with the exchange rate declining from EGP 19.72 per dollar on 26 October to EGP 22.80 per dollar at the time of writing, closing the gap with the market rate. black around 23 EGP for a dollar.

First, Fitch Solutions believes that the Egyptian pound will continue to weaken until the IMF agreement comes into force in December due to imbalances in the currency market.

They explained that the currency will cross the threshold of 23 EGP/USD in the coming days as the market adjusts, but it is unlikely to break above 24 EGP/USD as the CBE will try to avoid a significant overshoot of the pound. In 2023, they believe that foreign inflows will increase in the form of bilateral and multilateral financing, portfolio investment and FDI, which should ease depreciation pressures or even allow the currency to regain some of its strength. losses.

Second, given the massive currency sell-off, Fich Solutions now expects more pronounced inflationary pressures in the coming months. Indeed, we expect inflation to reach nearly 20.0% year-on-year in December 2022 and January 2023, and will likely remain in double digits throughout 2023.

“We have raised our average inflation forecast for 2022 to 13.6% and expect it to reach around 14.0% on average in 2023, especially if the authorities adjust electricity tariffs in July 2023 and continue to increase administered prices.Having suspected that the CBE might adjust its current inflation target from 5.0% to 9.0%, the CBE Governor confirmed that the Bank would do so and the new targets are expected to be announced by the end of the year,” the report says.

Thirdly, in this context, the report indicates that the CBE will maintain strict financial conditions. October’s unexpected hike is the CBE’s third rate hike this year after 100 basis points in March and 200 basis points in May, resulting in a cumulative increase of 500 basis points so far this year.

“While we were expecting a 100 basis point rise for the remainder of the year, the magnitude of the CBE’s move came as a surprise, both to us and to the markets, but we believe it is consistent with currency float. We suspect the CBE will hold short-term rates to gauge the impact of tighter financial conditions on inflation,” the report added.

Fourth, Fitch Solutions has reduced our growth forecast for Egypt for fiscal year 2022/23 to just 3.0%, the weakest rate since 2014. While some of the moderate growth is due to activity slow between July 2022 and December 2022 due to market distortion from import controls that have crippled manufacturing activity, additional issues arise from weak tourism activity and an increase in the cost of living which weighs on consumption. As a result, the recovery between January and June 2023, once the shortage of foreign exchange in the market is resolved and import restrictions removed, will be flattered by base effects. We will likely reduce Egypt’s score on our short-term political risk index to highlight social risks from rising inflation. However, the government’s new social programme, announced on October 26, could alleviate some of the social discontent caused by the economic crisis in the short term.