Fitch expects Egypt’s inflation to fall to 13% in 2018

CAIRO – 27 February 2018: Fitch Rating expected Tuesday that inflation in Egypt will fall further this year but remain in double digits, averaging around 13 percent, assuming that further subsidy reform in July leads to energy price increases, especially given higher oil prices.

Fitch anticipated in a report that the Central Bank of Egypt will cut rates further this year (another 200-300bps) even as global rates rise, while maintaining positive real interest rates.

The Central Bank of Egypt lowered the interest rate by 1 percent on February 15, as the inflation rates continue going downhill for the first time since November's flotation.

The bank cut its overnight deposit rate to 17.75 percent from 18.75 percent and its overnight lending rate to 18.75 percent from 19.75 percent.

The report said that the Central Bank of Egypt (CBE) has set out to control inflation expectations since exchange rate reform.

Fitch also expected that CBE will be mindful of the risk of some outflows, even though its stock of FX reserves rose to $38 billion, adding that CBE has other reserve assets linked to the bank’s portfolio repatriation scheme.

The report clarified that the high rates and the reform program have attracted a surge of foreign participation in the local debt market (non-residents held $19 billion of domestic government debt at the end of 2017).

“Interest rates on domestic government debt started to fall before February's rate cut, with the 91-day T bill rate 450bps lower than its July peak and the one-year T bill rate close to its pre-devaluation rate of around 16.5 percent,” Fitch noted.

Fitch said that the progress on macro-economic adjustment was reflected in January's Outlook revision, but the process is not risk free, adding that reforming subsidies and bringing down the government debt ratio is a multi-year process.

In January, Fitch revised the Outlook on Egypt's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR at 'B'.

“Relatively weak governance, security and political risks continue to weigh on the rating,” the report noted.

Fitch attributed their revision of Egypt’s Outlook to the first interest rate cut since exchange rate liberalization which has been made possible by an improvement in macro-economic stability, underpinned by more orthodox policy settings under the country's IMF program.

The Central Agency for Public Mobilization and Statistics (CAPMAS) stated that Egypt’s annual inflation declined to 17 percent in January 2018.

The Central Bank of Egypt (CBE) said that the Egyptian annual core inflation rate declined to 14.35 percent in January 2018 from 19.86 percent in December 2017.