• Downgrade Egypt to Underweight on rising discount rates
The CBE surprised the market with a 100bps rise in benchmark rates on Thursday, bringing YTD increases to a total of 250bps. We believe that market discount rates are too low – particularly given the risk of further rate rises when VAT is introduced – and downgrade Egypt to Underweight. We feel that high-yield names are at particular risk (oneyear T-bills are likely to rise sharply this week from their current pre-tax yield of 14.2%), and drop SIDPEC from the MENA Top 20 List. We add Mezzan, as we see a premium that is not priced in on consumer staples
stocks in the GCC, particularly given positive news on a potential sale of Americana, a Kuwaiti peer of Mezzan. In Egypt, we believe that real estate stocks continue to offer a good hedge against macro pressures.
• CBE move puts emphasis on price stability not budget… Thursday’s rate hike, which was larger than consensus and our expected 25bps forecast, clearly shows the Central Bank of Egypt’s commitment to its mandate of price stability overriding fiscal considerations. We see higher policy rates widening the budget deficit in FY16/17 by 0.3% of GDP to 11.7% as the interest burden becomes even larger (32% of total spending). However, the impact of the rate rise on economic growth and inflation trends is likely to be limited, given low leverage in the economy and the supply-driven nature of current inflationary pressures.
• …And no prelude to further devaluation We do not believe this rate hike implies further EGP devaluation in the short run. The tighter monetary policy is intended to signal a fight against already elevated levels of inflation, which would only get higher in the case of another devaluation round. Recent news suggests significant GCC support for reserves in the short term, while the pending passage of the VAT (likely in July) should release USD1bn from the World Bank. We therefore stick to our view that further adjustments to the EGP are more likely to happen as part of a larger change, namely an IMF agreement. Passing the budget and implementing the VAT remain preconditions for starting negotiations with the IMF, in our view, and we would see the introduction of VAT as potentially positive for Egyptian equities.

Simon Kitchen
Mohamed Abu Basha
Mohamed Al Hajj