CI Capital expected that the Central Bank of Egypt (CBE) will ease restrictions on absorption of excess liquidity in the first quarter (1Q) of 2020, suggesting a strong impact on the economy through the bank’s monetary policy, as it’s expected to lower interest rates by 2.5-3% next year.
The investment bank expected the country’s foreign direct investments (FDIs) to reach $7.4bn in the fiscal year (FY) 2019/20, and $8.9bn in FY 2020/21. Moreover, the CBE’s net foreign reserves are expected to reach $45bn in FY 2020/21, while the inflation rate to record 7.73% in FY 2019/20 and 8.20% in FY 2020/21.
In addition, the interest on deposits is speculated to reach 10.75% and 9.75% in FY 2019/20 and 2020/21, respectively. CI Capital expected the interest on borrowing to decrease to 11.75% in FY 2019/20 and 10.75% in FY 2020/21.
In a research note, the investment bank indicated that the excess liquidity will decrease to 8% of GDP in FY 2019/20, compared to 14% in FY 2018/19.
It is also expected that the CBE will inject liquidity of EGP 220-250bn from the existing balance, which is currently EGP 650bn.
The CBE is speculated to pump 50% of the expected liquidity during 1Q2020, while it will maintain interest rates during the remainder of this year.
The local currency will continue to be stabilise during FY 2019/20, and that liquidity pumping will not negatively affect the local currency, expecting the foreign assets of commercial banks to reach $10bn.
The net foreign assets play a pivotal role in preventing any fluctuation in the value of the local currency in the near term, and the stability can be achieved by pumping excess liquidity ranging between EGP 220-250bn in 2020.
This is a key factor in the stability of the inflation rate and prevents companies from adjusting prices in the event of a currency devaluation, which works to contain the cost curve in Egypt.
In terms of credit activity, CI Capital expected that pumping excess liquidity would lead to growth in credit activities, to calculate inflation at 12.2% on an annual basis for 2020, compared to an average of 6.6% during the past three years.
The credit ratio reached 58% of GDP for FY 2019/20, compared to 52% of GDP in FY 2018/19.
It is indicated that this leads to a significant increase in private investment, supported by improved consumption in the coming stage. CI Capital added that the manufacturing, wholesale, retail trade, tourism, real estate, education, and health sectors will contribute a greater share to the expected growth.
CI Capital added that Egypt will benefit from its ability in hedging against global challenges, pointing out that the CBE has good foreign currency liquidity amounting to $75bn, or 30% of GDP.
It is likely that the deficit-to-GDP ratio will continue to decrease to reach 7.4% and 6.8% in FY 2019/20, and FY 2020/21, respectively, compared to 8.5% in FY 2018/19.
CI Capital expected the GDP to reach $395bn in FY 2019/20, a growth of 5.8%, and $421bn in FY 2020/21, a growth of 6%.
The investment bank also believes that we are seeing a recovery of tourism revenues to their levels before the January 2011 Revolution, alongside with the stability of remittances from Egyptian expats in conjunction with FDIs that cover more than 60% of the current account deficit in FY 2018/19.
CI Capital hopes that tourism revenues would reach $16bn in FY 2019/20, and $19bn in FY 2020/21, while the Suez Canal revenues would record $5.7bn and $5.7bn in the same two fiscal years, respectively.