Egypt has had a difficult year, and the economy continues to face significant pressures - contracting 4.2% in the third quarter to March 2011 (their fiscal year runs from 1 July). This was the first negative y/y growth rate since 2002.
The Central Bank of Egypt’s Monetary Policy Committee (MPC) held a meeting on June 9, 2011 to decide on a monetary policy stance. Although Egypt is still facing inflationary pressures from both higher world food and oil prices, the MPC decided not to alter its key policy rates, keeping the overnight deposit rate and overnight lending rate unchanged at 8.25% and 9.75% respectively, while the 7-day repo remains at 9.25%. The MPC stated that “the slowdown in economic growth should limit upside risks in the inflation outlook”.
The balance of payments have remained compromised as a result a weakened current and financial account. Most notable is the Net Portfolio flows, which moved from a net outflow of USD 1.3 billion in the last quarter of 2010 to a net outflow of USD 5.5 billion in the first quarter of 2011. We expect that on an annual basis, portfolio flows will move to reflect a net outflow of USD 1.2 billion for the current year, compared to a net inflow of USD 7.9 billion in the previous year, led by equity net outflows of USD 5.3 billion in the Q1 2011, while bond net outflows amounted to USD 2.8 billion in this period.
The Egyptian Pound has stayed relatively stable, weakening only about 3% since the beginning of this year and the onset of the political unrest. It is clear that the Central Bank defended the currency quite aggressively with foreign exchange reserves, which have plummeted by 20% in this period, from USD 34 billion in January, to USD 27 billion at the end of May 2011.
A stable currency has fared very well for Egypt, both in terms of export receipts, which have allowed the country to benefit from higher oil prices, as well as keep inflation stable. Inflation for May 2011 reflected a year-on-year rate of 11.79%, declining from April’s 12.07%. On a month on month basis, inflation was +0.2% in May, compared to +1.21% in April.
Given the uncertainty still prevailing in that country, we expect growth for the current year to be lower than originally expected, particularly given the slow pick-up in the tourism sector, as well as a more negative global outlook. Monetary policy should remain unchanged, keeping rates stable in order not to exacerbate the growth problem, while changes in fiscal policy are unlikely, given an uncertain political situation.
By: Xhanti Payi - Assistant Economist
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