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Monday, 11 January 2021

A little bit limp

Annual urban headline inflation dropped to 5.4% in December from 5.7% in November, according to figures released Sunday by state statistics agency Capmas (pdf) and the central bank (pdf). On a monthly basis, prices fell at their quickest pace since June 2019 as falling food and beverage prices resulted in 0.4% deflation following 0.8% growth in November. The story is also getting a nod from Bloomberg and Reuters.

Food prices fell 1.2% during the month, having edged up 3.2% in November, despite seasonal spending during the winter holidays. The price of vegetables fell 10% on average during the month, compared to the 25% price growth seen in November.

Annual core inflation — which strips out volatile items such as food and fuel — fell to 3.8% in December compared to 4.0% in November 2020. Monthly core inflation remained flat during the month from November.

Annual general inflation for 2020 came in at 5.1%, down from 8.5% in 2019, Capmas said. The rate, which came in below the central bank’s target inflation range of 6-12%, triggered consultations with the IMF under the standby loan agreed last year. In response, the central bank has proposed that it lowers its target rate by two percentage points to 7% and narrows its range to +/-2%.

Expect inflation to remain within the 5-6.5% range in 1H2021 before accelerating in the back-half of the year to anywhere between 6 and 7.5%, Pharos’ Sandy Eskaros said in a note yesterday. This scenario would see inflation averaging 5.1% by the end of FY2020-2021, and 5.7% by the end of calendar year 2021 to remain within the CBE’s new target range. Meanwhile, Beltone’s Alia Mamdouh is forecasting inflation to remain within the bank’s new target range on average through to 4Q2022.

So are we gonna see interest rate cuts? With inflation accelerating throughout 4Q2020, the CBE is now expected to resume its monetary easing cycle this year, albeit cautiously, Eskaros writes. “We forecast a total of 200 bps of interest rate cuts in 2021, spaced out on different MPC meetings in response to the relevant monetary conditions.” Mamdouh expects the bank to make a 50 bps cut in its March meeting after leaving rates on hold next month.

The CBE left interest rates unchanged at its December meeting, citing rising inflation and global concern over the spread of new covid-19 variants. The hold followed two consecutive 50 bps rate cuts in each of November and September. With the record 300 bps cut in March, policymakers cut rates a total of 400 bps last year.

The central bank will next meet to review rates on 4 February.

Still eking out growth

Egypt will remain the only MENA country to continue its pre-covid growth trend in 2021 thanks to the government’s economic reform program over the past four years, Moody’s said in a research note last week. While Egypt, Morocco, and Jordan have benefited from IMF lending programs, most MENA and Levant countries will continue to suffer from high debt ratios that will negatively impact their sovereign creditworthiness. Limited access to international credit markets (as in the case of Tunisia and Iraq) as well as a muted tourism sector will continue to strain economies.

Moody’s expects a gradual recovery in GDP growth to 2.2% on average in the region this year following the 3.4% contraction in 2020.

Who else sees continued growth for Egypt: With vaccination programs expected to accelerate the global economic recovery in the coming year, the IMF has just bumped up its FY2020-2021 projections to 2.8% from the 2% it forecast in June. Fitch thinks we’re on track to grow at an average 4% clip over each of the coming four years, and the EBRD has penciled in an ambitious 5% growth for calendar year 2021. Looking further ahead, the World Bank says Egypt’s economy will return to pre-pandemic growth levels as of FY2021-2022, while Renaissance Capital recently predicted 2.8% growth in 2021, followed by a resurgence to 5% growth in 2022.

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