RenCap praises rate hike, as Mobius, local investors disagree
Voices in the wilderness? The central bank’s decision to increase policy rates by 200 bps on Sunday is probably “good news” for the EGP, Renaissance Capital’s chief economist Charles Robertson believes, the Financial Times reports. The move came later than hoped, Robertson says, but it shows “commitment to getting inflation back down again, after months where it has consistently been running high. Currency stability — which should be supported by the higher interest rate — will help drive down month on month inflation. Currency appreciation should help more.” RenCap still believes the EGP continues to be the cheapest EM currency, as it compares the current exchange rate to a “fair value” closer to EGP 14-15 per USD 1.
Proving there is one in every barrel, the Federation of Egyptian Chambers of Commerce is down with the rate hike. The Federation’s General Secretary Alaa Ezz described the move as “necessary medicine” to help curb inflation and “the only right move,” Al Borsa reports. He added that the inflation was a bigger threat to investors than a mere 200 bps spike in interest rates, which he downplayed as only a ‘marginal’ hike. Despite the shock to the EGX yesterday, Ezz believes the decision will not negatively impact foreign investors considering the higher rates of return.
People actually running business in Egypt were “in shock” following the hike, Ihab Farouk writes for Reuters’ Arabic service. “We don’t understand the logic of this decision,” Prime Holding economist Eman Negm said, telling Reuters that the rate hike may have the opposite effect of worsening inflation levels by raising borrowing costs for companies. An unnamed investment banker went a step further, calling the decision — taken under the recommendation of the IMF, according to an unnamed government official — “disastrous … what happened is a big mistake, but no one wants to listen.” A Cairo-based banker told the wire service, “It is clear that the IMF is going by the book while Egypt is different to other countries … so what works elsewhere does not necessarily work here. There are different dynamics, such as that less than 10 percent of the population is banked.”
Hani Berzi, CEO of top snack food maker Edita and head of the Food ExportersCouncil, says the rate increase was “an unpleasant surprise” that adds to the borrowing costs and increases pressure on state finances. Others in his industry shared his view, with the head of the food industries division of the Federation of Egyptian Industries (FEI), Ashraf El Gazayerli, saying the decision will be reflected in higher production costs and will slow down market activity and investment decisions. He tells Al Borsa that the move would exacerbate food inflation.
The fear was reflected in the auto industry as well, as Alaa Saba from the Automotive section of the Federation of Egyptian Chambers of Commerce says the rate increase will feed into an increase in inflation in the future. He says “if I have to borrow now it’ll cost me over 18% … this will feed into higher prices for everyone.” Bavaria Auto Group board member Khaled El Saad tells Al Borsa that this will negatively impact sales as 70% of car buyers borrow.
The Federation of Egyptian Industries (FEI) issued a statement yesterday saying the hike was poorly timed and puts extra pressure on Egyptian industry. The higher interest rates will hamper the ability to expand and attract new investments, FEI head Mohamed Elsewedy says, according to Al Borsa. Elsewedy called on the central bank to allocate funds to provide credit to Egyptian manufacturers at reduced interest rates to support their competitiveness.
OTMT boss Naguib Sawiris said the move would give foreign investors pause, as it reflects a lack of stability in monetary policy considerations, Al Mal reports.
Emerging markets icon Mark Mobius won our hearts when the Templeton Emerging Market Group executive chairman told Bloomberg that raising rates “go[es] well and good when the environment is healthy. But in an environment like in Egypt now, it is not a healthy situation at this stage… Unfortunately, people believe that if you raise interest rates, you lower inflation and inflation expectation… This is not necessarily the case.” Echoing Berzi’s comments, Mobius says: “Rates are so high now, how can a businessman survive?” And agreeing with RenCap’s notion that the rate hike will support the EGP, Mobius suggests that a weaker EGP is preferable at this stage to “get exports going.” Salah Shamma, head of Investment, MENA Equity, Franklin Templeton Investments (ME) told Reuters that he expects the rate hike to support the EGP and continue to attract foreign inflows, which should replenish the country’s foreign reserves and find its way to the local banking sector. Pharos Holding breaks down the decision here (pdf).
The banking community did not immediately hike rates. Official reactions from the sector have been muted as senior banking executives were reportedly locked in meetings all of Monday to study the impact of the decision, Daily News Egypt reports. Top state-owned banks the National Bank of Egypt and Banque Misr will await until their Alco (assets and liabilities committees) meetings sometime on Wednesday, according to Al Masry Al Youm. Banque Misr’s head Mohamed El Etreby said the hike in interest rates would have no impact on 18-month CDs issued by banks following the EGP float with yields of up to 20%. A notable exception to this wait and see plan was Banque Misr raising interest rates on VIP savings deposits 200 bps, Al Mal reports.
The Ismail government put on its best poker face, with the sole comment of note being one from Deputy Finance Minister Mohamed Maait, who said the inflation rate spike would not impact the FY2017-18 budget currently being discussed by the House of Representatives, Al Borsa reports. Speaking of the House, opinions appear to be divided between its budget and economic committees. Budget Committee member Mohamed Fouad called for an inquiry into the move, stating that it foreshadows a monetary crisis. The interest rate hike appears to have found support from House Economic Committee member Ashraf El Araby, according to Al Mal.
Meanwhile, average yields on Egypt’s five-year and 10-year treasury bonds jumped at an auction on Monday, according to the Finance Ministry. The yield on the five-year bond rose to 18.760% from 17.357% at the previous auction, while the yield on the 10-year bond increased to 18.652% from 17.244%.