Virus May Extend Egypt’s Rate Pause Even as Inflation Slows

(Bloomberg) --

The first slowing in Egyptian inflation since October may not spur further interest-rate cuts as authorities brace for the potential impact of the global coronavirus outbreak on capital outflows and tourism income.

Urban consumer prices rose 5.3% in February compared to 7.2% the previous month, helped by the statistical effect of a high base a year earlier, the state-run CAPMAS statistics agency said Tuesday. On a monthly basis, prices remained unchanged. Core inflation, the gauge used by the central bank and which strips out volatile and regulated items, slowed to 1.9%.

The North African country, which cut interest rates by a cumulative 450 basis points last year, had been expected to resume its easing cycle in 2020 as authorities looked to encourage private investment. In addition to the viral outbreak that’s put countries in lockdown and upended markets, the oil-price war between Saudi Arabia and Russia has also complicated the calculation.

“The virus could have a negative impact on Egypt’s external balance, whether on capital outflows or lower tourism and Suez Canal revenues,” said Mohamed Abu Basha, head of macroeconomic research at Cairo-based investment bank EFG Hermes. That, he said, means the central bank will probably hold rates when it meets April 2.

Tuesday’s figures point to Egypt’s success in taming inflation, which rocketed to over 30% in the wake of a dramatic economic overhaul that began in late 2016 and involved a currency devaluation and sweeping subsidy cuts.

With inflation well within the central bank’s target range of 9%, plus or minus 3 percentage points by the end of 2020, easing rates and pumping stimulus could give the non-oil private sector a much-needed boost. Egypt’s PMI index has been below 50, a sign of contraction, for every month since August.

While lower oil prices could bring some benefits to Egypt -- which is usually a net importer and has based its current budget on $62 a barrel -- the turmoil is still likely to weigh heavily on its economic outlook. A slowdown in Gulf economies could also have a knock-on effect.

Egypt, where tourism is a major source of income, has so far reported 59 cases of the coronavirus, many of them linked to a Nile cruise, as well as the first death from the disease on the African continent. Overseas worker remittances are another key source of foreign currency, and it’s not yet clear how they’ll be affected.

Amid the turmoil, Egypt may be keen to maintain the high real interest rates that have made its debt a favorite for investors in emerging markets.

The central bank is “highly likely” to hold rates in its upcoming meeting “in light of the associated pressure on emerging market currencies, which will impact foreign portfolio investments,” said Radwa El-Swaify, head of research at Cairo-based Pharos Holding.

The recent cut by the U.S. Federal Reserve, however, could give Egypt’s central bank room to follow suit, according to Allen Sandeep, director of research at Naeem Brokerage in Cairo. With the latest slowing in inflation, “real rates are just too high,” he said.

To contact the reporters on this story: Mirette Magdy in Cairo at mmagdy1@bloomberg.net;Tarek El-Tablawy in Cairo at teltablawy@bloomberg.net

To contact the editors responsible for this story: Nayla Razzouk at nrazzouk2@bloomberg.net, Michael Gunn, Mark Williams

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