Egypt’s Pound Seen Withstanding Liquidity Release of $15 Billion

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(Bloomberg) -- Egypt’s central bank can afford to ease up its management of liquidity without hurting the pound, according to CI Capital.

The central bank is set to allow for the release of up to 250 billion pounds ($15 billion) in its so-called corridor-linked deposits, starting to “loosen its grip on excess liquidity absorption” from the first quarter of 2020, CI Capital said in a report on Tuesday. As it unlocks the funds, it will likely cut interest rates by 2.5 to 3 percentage points next year after staying on pause through the rest of 2019, the Cairo-based investment bank said.

The pound won’t come under pressure as a result, averaging 17.11 against the dollar in fiscal year 2020/2021, according to CI Capital economists including Noaman Khalid. “A stable exchange rate is essential to stimulate the economic cycle without disrupting supply-side factors, achieving non-inflationary growth,” they said in the report.

  • The release of the “excess liquidity” expected to trigger inflation-adjusted credit growth of over 12% in 2020 versus an average of -6.6% during the past three years
    • “We find this sufficient for the pick-up in economic activity to have a trickle-down effect”
  • CI Capital expects “a slight depreciation in the currency” in fiscal year 2020/2021 by an estimated 5%-8%.
  • Investments to grow 15% in fiscal year 2019/2020, contributing 2.5% to the bank’s projection for economic growth of 5.8%
  • The budget deficit is on track to continue to narrow over the coming two years
  • “The narrowing of the fiscal deficit is key, as it would further confirm our outlook on credit activity as not to cause any crowding out effect of the private sector”

©2019 Bloomberg L.P.

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