Books – Islam Saeed
Wednesday, March 6, 2024 09:28 PM
Fitch Ratings said, “After raising interest rates by 600 basis points on March 6, expectations indicate that the Central Bank of Egypt will maintain the overnight lending rate at 27.25% and the overnight deposit rate at 28.25% for the rest of the year, which is a positive step.” It indicates the seriousness of the Central Bank of Egypt in reducing inflation.
She added that given that inflation may have slowed to below 25% year-on-year in February, the interest rate hike was sufficient for real interest rates to return to positive. Even with currency liberalization, inflation will hover at around 30.0% until 2024, which will keep real interest rates close to positive.
At the same time, the Fitch report explained, yields on government bonds will also become positive, and as foreign exchange risks recede, this will attract portfolio investors back into the Egyptian debt market even earlier than expected.
However, the agency expects the exchange rate to remain volatile in the short term until the market adjusts to the long-awaited depreciation of the currency.
While the exchange rate is currently weaker than the agency’s long-expected range of EGP 40.00/$ to EGP 45.00/$, it remains close to the EGP 50.00/$ level.
The outlook for the currency’s value in the short term will depend on how much foreign currency the Central Bank of Egypt will make available through banks, but it is estimated that the exchange rate will stabilize near EGP 50.0/USD by the end of the year if portfolio investments materialize as the agency expects.
The agency believes that the authorities will have enough foreign currency to quickly close the gap with the widely used parallel market rate.
Egypt has received the first tranche ($10 billion) from a new investment deal with the United Arab Emirates, and more will come in the short term through a new IMF program Promises. Portfolio investment flows.
With monetary policy tightened and the currency floating, Egypt has now met the IMF’s basic requirements to secure a new, larger programme, as the measures announced were adopted as part of a set of comprehensive economic reforms in coordination with the government, and with the firm support of multilateral and bilateral partners.
Recent measures taken by the Egyptian authorities to attract foreign financing should help Egypt cover its financing needs in the medium term. Investors share this view, which led to a decline in credit default swaps for 5-year eurobonds.
However, for the decline in risk perception to become permanent, the authorities will need to quickly move forward with the privatization plan and structural reforms to improve the business environment and attract sustainable financing and foreign direct investment.
While portfolio investments will mitigate pressures in the short term, they will leave Egypt vulnerable to fluctuations in investor sentiment in the event of shocks.
Geopolitical risks arising from the war between Israel and Hamas and the Red Sea crisis remain high and constitute a source of risk to Egypt’s macroeconomic stability.
The agency believes that the political risks resulting from the announced measures will remain under control, because the authorities’ crackdown on money traders and speculators and positive news (such as the recent UAE investment deal) led to the strengthening of the Egyptian pound in the parallel market from around 75.0 EGP/USD in January. 2024 to about 50.0 EGP/USD.
The appreciation of the currency in the widely used parallel market has had a positive psychological impact on Egyptians, as they will buy dollars at a much stronger official rate than the parallel market rate of 75 Egyptian pounds/US dollar. This made floating the currency more socially acceptable.
The agency maintained its expectations that economic growth will slow from 3.8% in the 2022/2023 fiscal year to 3.2% in the 2023/2024 fiscal year before rising by 4.2% in the 2024/2025 fiscal year, as tighter monetary policy than expected will lead to… Increased borrowing costs for businesses and households, which will negatively impact domestic consumption and investment.
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