• FX deposit limits for individuals lifted; EGP is on adjustment path Yesterday, the Central Bank of Egypt lifted deposit and withdrawal limits on individuals, which we see tactically aimed at cooling down speculation by individuals of a weaker USD-EGP; one that has sent the parallel market rate to a record EGP10.0. Indeed, the measure seems to have initially calmed down the market with the rate reportedly falling to EGP9.80/85 by end of day. Strategically, the decision is further evidence that the CBE is setting the EGP on a floating path as restrictions are gradually removed starting with the decision in February to ease deposit limits five-fold for importers of basic commodities and intermediary goods and twenty-fold for exporters.
• USD rally in parallel market – A speculative, low liquidity rally The USD-EGP’s parallel market rate has risen c13% in the past three weeks hitting an all-time low of EGP10.0 and raising the premium to the official rate to a record 27%. We note two drivers behind this rally (based on anecdotal evidence): i) it was primarily driven by individuals that increasingly bet on a weaker EGP; and ii) it was light-volume driven due to the tight supply.
• What’s next, waiving the limits for corporates? Waiving the limits for corporates would be the next, much-awaited move whereby the CBE would aim to improve FX availability for companies and channel FX liquidity into the banking system, improving the circulation of FX liquidity in the economy. In that sense, the CBE would have to be tolerant of living with two exchange rates for a while until inflows start improving. We still need to see signs of the latter – more realistically a lift of the travel ban from Russia as well as building the ‘liquidity shield’ – before anticipating EGP devaluation.
• CBE lately allowing yields to rise; expect a hike on 17 March In addition, we expect the CBE to further tighten the monetary policy to drain EGP liquidity and reduce speculative activity in addition to reacting to higher inflation expectations as a result of a weaker EGP and higher import tariffs on various consumer goods. Indeed, recently yields on government debt have started to increase – after a period of pressure to keep them lower – a sign that the CBE is willing to extend the scope of the tightened monetary policy, in our view. Private banks have refrained from increasing deposit rates as they have not seen any incentive with yields remaining stable. We expect a 50 basis points hike in 17 March’s MPC meeting.

Mohamed Abu Basha