Egypt to Retain Allure of World’s Top Real Rate: Decision Guide

(Bloomberg) --

Egypt is expected to leave the world’s highest real interest rate unchanged Wednesday to burnish the allure of its debt as the pandemic keeps tourists and their cash holed up at home.

With inflation subdued, the central bank has room to loosen monetary policy. Yet it’s unlikely to while elevated global rates and high commodity prices persist. Nine of 10 economists surveyed by Bloomberg predict the Monetary Policy Committee will hold its benchmark deposit rate at 8.25% for a fourth consecutive meeting.

“Inflation is below target, growth is sluggish and policy is tight,” said Simon Williams, chief economist for Central & Eastern Europe, the Middle East and Africa at HSBC Holdings Plc. “But portfolio flows need to remain strong until tourists start to come back and foreign direct investment gains,” he said. “That means keeping real rates high.”

Egypt’s real rate -- the difference between its inflation and policy rates -- is the highest of more than 50 economies tracked by Bloomberg. Annual consumer prices remained unchanged at 4.5% in March, below authorities’ target range of 5%-9%.

The North African nation’s local debt withstood the first-quarter selloff in global bond markets with an average gain of 1.8%, the highest return in emerging markets after Argentina.

Its Treasury bills offer an average yield of 13.4%, compared with 3.5% for emerging-market local-currency debt. And officials aim to maintain that attractiveness, targeting a 13.2% average interest rate on T-bills and bonds in the fiscal year starting in July, according to budget documents distributed this week.

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Deutsche Bank AG is still overweight on Egyptian local debt as it “remains the preferred local market among the frontiers and we find risk-reward even more attractive than in Turkey,” its analysts, including Danelee Masia and Christian Wietoska, wrote in a note.

Local bonds could get an extra boost from their presence in a JPMorgan Chase & Co. index, with the bank putting Egyptian debt on review for inclusion in its local-currency government bond gauge, citing its increased liquidity and easier access for foreigners.

The Deutsche Bank analysts see portfolio inflows from the move offsetting any hit to the current account from lower tourism revenues, a key source of income for the economy.

Egypt also wants to get its local debt settled by Belgium-based Euroclear Bank SA by the end of the year. Foreigners currently have to go through local lenders to invest in Egyptian debt.

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“There is a tension between what is good for the domestic economy and what is good for external finances. But we believe rates could go significantly lower before portfolio investors start to get turned off Egypt,” said Farouk Soussa, an economist at Goldman Sachs Group Inc., who expects 50-basis-points cut.

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