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Thursday, 20 September 2018

Food for thought: Could the central bank let the EGP slip a bit against the USD?

**#3 Food for thought: Could the central bank let the EGP slip a bit against the USD? Against the backdrop of the Emerging Markets Zombie Apocalypse, a research report this week from Shuaa Securities’ Egypt office sees two possible scenarios when the central bank’s monetary policy committee meets a week from today:

  1. Hike interest rates at least 100 bps in the short-term to keep Egyptian debt attractive to the carry trade amid rising competition from other EM and the generally chill running through a certain type of EM investor at the moment.
  2. Leave rates on hold and signal to the banks that they should allow the EGP weaken a bit. Shuaa notes that over the past six months or so, we’ve seen the USD gain 5.5% and EM currencies slide c. 7.8% — but the EGP has lost only 1.7% in the same period. Allowing the EGP to slide a bit, it writes, “could limit foreign outflows from Treasuries (as they would be losing on the FX side).”

Pros and cons: Shuaa figures the rate hike is the less likely of its scenarios, saying it would drive up state borrowing costs too much (at the same time, we note, that the Finance Ministry is putting on a full-court press to manage Egypt’s debt position) and would also be negative for equities. The firm likes its second scenario, but notes the knock-on effects on inflation could be ugly.

Why this matters to the fall IPO season: Shuaa suggests that with foreign appetite key to upcoming equity offerings, prospective issuers need to hope for continued EGP stability — and will need to think twice about pricing: “Valuation multiples these stock offerings will be sold at should imply an attractive discount to fair value.”

When do we find out? The Central Bank of Egypt’s MPC next meets a week from today (27 September) and then again on 15 November and 27 December. We still see it leaving rates unchanged, but…

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