Egypt Shuns a Rate Cut With $10 Billion Funding Gap in Focus
Egypt’s $10 Billion Funding Gap Likely to Stall Rate Cut for Now
(Bloomberg) -- Egypt kept interest rates unchanged as authorities guard against an emerging markets sell-off and focus on bridging a financing gap spurred by the coronavirus pandemic.
The central bank maintained the deposit rate at 9.25% and its lending rate at 10.25% for the second straight month, it said Thursday in a statement. Eleven of 14 economists surveyed by Bloomberg had predicted a hold after a record 300 basis points were slashed at a March 16 emergency meeting.
While there was a slowdown in economic activity in March and April, “the diversity of the economy provides some cushion given the resilience of some sectors,” the bank said. Holding rates is consistent with its inflation goal of 9%, plus or minus 3 percentage points, by the fourth quarter and medium-term price stability, it said.
The North African nation is now looking for ways to cover a financing shortfall estimated at about $10 billion in 2020 by EFG Hermes and Goldman Sachs Group Inc., as some of its main foreign-currency sources -- tourism, remittances and Suez Canal receipts -- take a hit from Covid-19.
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| “Egypt’s central bank kept rates on hold despite slowing economic activity to avoid a fresh round of capital flight, further declines in international reserves and a dwindling of foreign assets at commercial banks.” -- Ziad Daoud |
A favorite for carry-trade investors, Egypt saw its biggest-ever capital outflows of about $17 billion in the past two months. And with annual inflation accelerating in April for the first time in 2020, it risks losing the higher-rate buffer that had fueled its investment appeal.
The country, which completed a three-year International Monetary Fund program in 2019, this week received $2.8 billion under the lender’s emergency financing instrument. It’s now seeking more than $5 billion from the fund via a stand-by arrangement, as well as $4 billion from other institutions, an official told Bloomberg.
Net international reserves, at an all-time high before the outbreak, have declined by almost a fifth to $37 billion in the past two months. The central bank partially covered the pullback of overseas portfolio capital through its repatriation mechanism, which guarantees investors can withdraw profits in hard currency.
The MPC “closely monitors all economic developments and will not hesitate to utilize all available tools to support the recovery of economic activity, within its price stability mandate,” according to the statement.
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