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11-Dec-2018

Egypt Economics - Inflation decelerates in November as food price shock dissipates

Good inflation reading for November

Egypt’s annual headline urban consumer price inflation decelerated to 15.7% in November from 17.7% in October, reversing two months of elevated inflation readings, as a food price shock in fruits and vegetables started to dissipate. On a monthly basis, headline inflation contracted 0.8% M-o-M, only the second month to see prices fall – at least since the devaluation, back in 2016. The price decline was driven by food prices, which dropped 1.8% M-o-M, thanks to declining prices of both fruits (8.9%) and vegetables (3.4%); sharp jumps in the prices of the two drove notable acceleration in headline inflation over the past two months. The fading away of that shock confirms our view that such sharp price volatility in these two items tends to dissipate relatively quickly, given their short-term harvest period, and is typical of Egypt’s inflation dynamics. Meanwhile, the muted monthly non-food (0.3%) and core (0.5%) inflation further support our view that underlying inflation trends in Egypt continue to normalise after two years of turbulence. Annual core inflation has now dropped to a three-year low of 7.9%.
 
Stable inflation ahead of upcoming fuel-price liberalisation

We expect inflation to further decelerate in December and January as the food price shock dissipates, based on our monitoring of local markets. We see 14-15% as the normalised inflation rate, and we expect such rate to persist at least up to Jun 2019, when the government is set to liberalise fuel prices at cost recovery. The process is set to initially start in January with indexation, meaning prices changing every month/quarter to reflect changes in global oil prices and FX movements; the process is likely to start, though, only with premium 95 octane, the highest gasoline grade in the country, to introduce the concept to the public. This should have a minimal impact on inflation, given that fuel grade accounts for only a small share of overall fuel consumption. Assuming oil prices of USD70/b, we expect fuel prices to see a hike of 20-25% on average in Jun 2019, likely leaving inflation at 14-15%.
 
Maintain outlook for stable interest rates

The normalisation of headline inflation in November provides further comfort to the Central Bank of Egypt (CBE) that its 13% +/-3% inflation target range is likely to be met. Core inflation’s deceleration to a three-year low also provides relative comfort for overall inflation dynamics ahead of the upcoming fuel prices. Nevertheless, we continue to see inflation remaining on hold for most of 2019 as the country prepares for the final fuel price hike, which is largely linked to the uncertain trajectory of oil prices. Therefore, we do not see major chances for any rate cuts before 4Q19.

Mohamed Abu Basha
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