Egypt- BofAML forecasts more flexible USD against EGP

(MENAFN- Daily News Egypt) The Egyptian pound is expected to be mildly more flexible against the US dollar, as the treasury bill (T-Bill) carry and foreign exchange (FX) reserves are likely to remain high, according to Bank of America Merrill Lynch's (BofAML) World at a Glance report issued on Sunday.

The report indicates that Egyptian authorities have approached the IMF for a new programme, adding that the IMF engagement is likely to be in a non-lending capacity with an upper-tranche conditionality. 

'For now, macro stabilisation continues and the reform momentum is intact, as the fourth quarter (Q4) of 2018 current account deficit widened sequentially by $1.5bn to $2.2bn and stood at $6.3bn (2.5% of GDP) on a trailing basis, from a peak of $20.1bn (6.0% of GDP) in 4Q16,' said the report.

Furthermore, the report cites that Egypt's net international reserves (NIRs) stood at $44.3bn in May (7.1 months of import coverage), up from $17.5bn in June 2016. The Central Bank of Egypt (CBE) holds in addition $7.2bn in deposits not reported in reserves.

Last Wednesday, IMF Acting Managing Director and Chairperson, David Lipton, said that the deepening and broadening of Egypt's effective reforms is critical to underpin the positive outlook for growth and unemployment of the country, following the board's approval of Egypt's final loan $2bn tranche disbursement.

Egypt successfully completed the $12bn three-year arrangement under the Extended Fund Facility which is the full amount approved by the IMF in November 2016.

According to Egypt's section in the BofAML report by MENA Economist, Jean-Michel Saliba, as of March, foreigners held $14.9bn of T-bills, after $10.8bn in outflows in 2018. Foreign holdings represent c19% of the outstanding T-Bill stock and c29% of NIRs including deposits not included in reserves and stood at $17.4bn in April.

Moving to monetary conditions, the report cites that headline inflation stood at 14.1% year-over-year in May.

The CBE cut policy rates by 100 basis points (bps) opportunistically in February; the key is for real rates to remain high in an emerging market (EM) context. 'We see the CBE remaining on hold for the rest of the first half (H1) of 2019 and a tight monetary policy stance hinted by the new inflation target of 9% (±3%) on average for 4Q20,' the report added.

In a similar fashion, Lipton said on Wednesday that the CBE should remain cautious until disinflation is firmly entrenched, asserting that exchange rate flexibility remains essential to improve resilience to shocks and preserve competitiveness.

'Monetary policy remains anchored by the medium-term objective of bringing inflation to single digits. Core inflation appears to be well contained," he added.

Moreover, the BofAML believes that Egypt's fiscal year (FY) 2019 budget is key to anchor debt dynamics. A primary surplus of 0.2% of the GDP in FY 2018 has been achieved due to energy-subsidy reform and value-added tax (VAT) hike, excluding the CBE recap costs. 

The IMF shared a similar view, as Lipton said that the 2018/19 primary surplus target of 2% of the GDP was met, helping to anchor a further decline in the public-debt-to-GDP ratio. It will be important to maintain primary surpluses at this level over the medium term to keep public debt on a downward trajectory.

Additionally, the BofAML report indicates that the target is to bring the primary surplus to 2% of the GDP in FY 2019 and keep it there. FY 2019 reforms include fuel subsidy reform, wage bill control, and improved tax mobilisation.

Finally, the report highlights that Egypt's financing gap, reform slippage due to the socio-political backdrop or a hasty IMF program exit, reversal of portfolio flows, high inflation, loss of competitiveness, political instability, eroding real effective exchange rate competitiveness, and security issues are the main risks.

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