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Wednesday, 30 December 2020

How the CBE plans for future risks

Want to know what’s keeping the CBE up at night? Have a look through the central bank’s latest Financial Stability Report, which takes a deep dive into a range of risk scenarios for Egypt and how they might be managed should they come to pass.

One of the more interesting (if presently unlikely): What could prompt the CBE to reverse course on easing and start raising rates? Covid, of course.

Here’s how it might work: The report points to a potential series of events, starting with the second wave slowing down GDP growth as tourism grinds to a halt and other industries also take a hit. The budget deficit could also widen if the government needs to ramp up public spending on healthcare services and roll out fresh stimulus (which Finance Minister Mohamed Maait said earlier this month the government is ready to do). A widening deficit and shrinking economy could come together with another drop in FX streams — namely lower remittances from Egyptians abroad, a dip in Suez Canal revenues, and potential portfolio outflows — to throw off the balance of payments and bring the currency under pressure. This scenario would, in turn, create inflationary pressure that could require the central bank to reverse its monetary easing cycle and raise rates again.

The report makes clear the bank is still on its easing path, pointing out that easing can likely continue as it did during the first wave, particularly that the likelihood of a significant spike in inflation is low.

There’s lots more in the report (pdf), which dives into multiple risks, systemic security and policy options for how the CBE could act in a variety of situations.

The CBE has cut interest rates by 400 bps this year, including a record 300 bps cut in March and 50 bps cuts at two consecutive meetings. The bank’s monetary policy committee decided to leave rates on hold at its final meeting of 2020 last week, citing global concern about the new covid-19 variant, but expectations are that CBE is still on an easing path — barring a shock such as the one above.

SEPARATELY- The CBE is launching a multicurrency real-time gross settlement (RTGS) system next year, the report says, without specifying when in 2021 we can expect the system. The CBE has had an RTGS system — which is used to process large-value and “the most important types of funds” — in place since 2009, but the system will be upgraded to include multiple foreign currencies.

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