Egypt: PIF steps up investment; CBE rate hike on the cards
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Egypt: PIF steps up investment; CBE rate hike on the cards

Saudi Arabia’s Public Investment Fund has stepped up investments into Egypt this week that will help to ease external financing concerns. At the same time, electricity rationing will begin next week to free up more natural gas (which Egypt relies on for power) for export in an effort to narrow the large current account deficit. However, these measures will only provide a short-term reprieve and a weaker pound and steps to attract more direct investment will be key to putting the external position on a more sustainable footing. Meanwhile, rising inflation is likely to prompt the Central Bank of Egypt to resume its tightening cycle with a 50bp hike, to 11.75%, next Thursday.

PIF stumping up the cash for Egypt

Saudi Arabia’s Public Investment Fund (PIF) established an arm in Egypt this week and has moved quickly to purchase stakes in several firms, which will help to ease external financing concerns. But a weaker pound is still needed to put the external position on a sustainable footing.

The Saudi Egyptian Investment Company acquired a 25% stake in Misr Fertilizers Production Company (Mopco), a 19.82% stake in Abu Qir Fertilisers, a 25% stake in e-Finance, and a 20% share in Alexandria Container and Cargo Handling. The deals totalled $1.3bn (0.3% of Egypt’s GDP) and were the first of a $10bn pledge of investments from PIF. Meanwhile, Egypt announced it will ration electricity from next week to free up more natural gas (which Egypt relies on to generate electricity) for export to bolster export revenues.

Greater gas exports will narrow the current account deficit and investments from PIF will provide financing, easing strains in the balance of payments. However, this will merely provide a short-term solution. Egypt remains still heavily reliant on portfolio inflows that are vulnerable to swings in investor risk appetite. And the PIF’s investments, which are a form of direct investment, are unlikely to result in a step-up in productivity growth in the companies involved. Meanwhile, electricity rationing risks disrupting economic activity.

As we have argued, Egypt is in need of a longer term solution to fix its external imbalances. Officials do seem to have taken heed of this with the shift to a more flexible exchange rate regime, but they will need to stick to this and allow the pound to weaken over the coming years. In order to raise foreign direct investment, Egypt’s government will need to undertake wider structural reforms to improve the attractiveness of the local business environment.

Central Bank of Egypt set to resume tightening cycle

A further rise in inflation in Egypt last month has shortened the odds of the Central Bank of Egypt (CBE) resuming its tightening cycle next Thursday.

The headline inflation rate rose to a three-year high of 13.6% y/y in July on the back of stronger non-food inflation due to a hike to local fuel prices and the impact of the weaker pound. We think that both of these factors will continue to push inflation upwards over the rest of this year, with the headline rate peaking at around 18% y/y in Q4 – well above the upper bound of the CBE’s target range of 7±2%.

The CBE kept rates on hold at June’s meeting as the shift to a more flexible exchange rate has taken some pressure off officials to raise rates to shore up the pound. But, against the backdrop of rising inflation and tighter policy globally, rate hikes will probably be back on the agenda. We think the CBE will raise interest rates by 50bp, taking the overnight deposit rate to 11.75%, on Thursday. Beyond that we have pencilled in a further 100bp of hikes by year-end, which is more hawkish than the consensus expects.

In case you missed it

Earlier this week we published an Update taking a closer look at Qatar’s LNG sector and whether it can offset the loss of Russian gas exports to Europe. In the short term, the answer is no. Qatar is producing at or near to its capacity and there are no new facilities due to come online anytime soon. From 2025, however, the North Field facility will raise Qatar’s LNG production capacity by over 60%, and could be a gamechanger. We discussed this in further detail on a Drop-In with our Commodities team on Tuesday, the recording of which can be found here.

The week ahead

Aside from the CBE decision, the main data release is Saudi inflation. We expect the headline rate rose to 2.6% y/y in July. (See Data Preview.)

Data Previews

Saudi Arabia Consumer Prices (Jul.) Mon. 15th Aug.

Forecasts

Time (BST)

Previous

Consensus

Capital Economics

Consumer Prices (% m/m (% y/y))

(07.00)

+0.2 (+2.3)

+0.5 (+2.6)

Inflation to edge a little higher

We think that Saudi Arabia’s headline inflation rate rose to 2.6% y/y in July and mark the peak in inflation in the Kingdom.

The headline rate edged up from 2.2% y/y in May to 2.3% y/y in June. The breakdown of the data showed that food and beverage inflation increased to 4.4% y/y, its fastest pace in a year. Meanwhile, our measure of non-food inflation was unchanged for the fourth month in a row at 1.8% y/y.

We think that inflation rose a touch to 2.6% y/y last month. Food inflation is likely to have been unchanged. But non-food inflation probably picked up although dampened by the government’s local fuel price cap that put downward pressure on transport inflation.. We think this will mark the peak of inflation and leave inflation in Saudi the lowest inflation rate among the G20 economies.

Further ahead, we think inflation will edge back over the remainder of this year and stabilised at 1.5-2.0% y/y. It should remain around this rate over 2023-24. (See Chart 1.) And, if anything, the risks to our inflation forecast lie to the downside if the government opts to cut the rate of VAT.

Chart 1: Saudi Arabia Consumer Prices (% y/y)

Sources: General Authority for Statistics, CEIC, Capital Economics


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (BST)

Previous*

Median*

CE Forecasts*

Fri 12th

Jor

Consumer Prices (Jul.)

-

+1.0%(+5.2%)

-

-

Sat 13th

-

No significant data or events scheduled

-

-

-

-

Sun 14th

-

No significant data or events scheduled

-

-

-

-

Mon 15th

Sau

Consumer Prices (Jul.)

(07.00)

+0.2%(+2.3%)

-

+0.5% (+2.6%)

Tue 16th

Tun

Industrial Production (Apr.)

-

(+2.4%)

-

-

Wed 17th

Tun

GDP (Q2, q/q(y/y))

-

+0.7%(+2.4%)

-

-

Thu 18th

Egy

Interest Rate Announcement

-

11.25%

-

11.75%

Selected future data releases and events

22nd Aug

Mor

Consumer Prices (Jul.)

-

+0.5%(+7.2%)

-

-

Qat

Private Sector Credit (Jul.)

-

-

-

-

24th Aug

Sau

Balance of Payments (Jun, SAR.)

(07.00)

90.3bn

-

-

Kuw

Consumer Prices (Jul.)

-

+0.4%(+4.4%)

-

-

25th Aug

UAE

Private Sector Credit (Jul.)

-

-

-

-

28th Aug

Sau

Private Sector Credit (Jul.)

(16.00)

(+14.1%)

-

-

31st Aug

Tun

Industrial Production (May)

-

-

-

-

1st Sep

Jor

Industrial Production (Jun.)

-

+(3.9%)

-

-

2nd Sep

Bah

Consumer Prices (Jul.)

-

(+3.1%)

-

-

6th Sep

Kuw

Private Sector Credit (Jun.)

-

(+9.35%)

-

-

Egy

Foreign Exchange Reserves

-

$33.1bn

-

-

Tun

Consumer Prices (Jul.)

-

+1.0%(+8.2%)

-

-

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Refinitiv, Capital Economics

Main Economic & Market Forecasts

Table 1: Central Bank Policy Rates

Policy Rate

Latest
(11th Aug.)

Last Change

Next Change

Forecasts

End 2022

End 2023

End 2024

Saudi Arabia

Reverse Repo Rate

2.50

Up 75bp (Jul. ’22)

Up 50bp (Sep. ‘22)

3.75

3.00

2.50

Egypt

O/N Deposit Rate

11.25

Up 200bp (May ’22)

Up 50bp (Aug. ‘22)

12.75

12.75

9.75

UAE

Repo Rate

2.90

Up 75bp (Jul. ’22)

Up 50bp (Sep. ‘22)

4.15

3.90

3.40

Algeria

Discount Rate

3.25

Down 50bp (Mar. ’20)

Up 50bp (Jun. ’22)

5.50

6.25

6.00

Qatar

Deposit Rate

3.25

Up 75bp (Jul. ’22)

Up 50bp (Sep. ‘22)

5.25

5.00

4.50

Kuwait

Discount Rate

2.50

Up 25bp (Jul. ’22)

Up 50bp (Sep. ‘22)

4.25

5.00

4.75

Morocco

Key Rate

1.50

Down 50bp (Jun. ’20)

Up 25bp (Q3 ’22)

2.25

3.50

3.50

Oman

O/N Repo rate

1.50

Up 75bp (Jun. ’22)

Up 75bp (Jul. ’22)

4.75

5.25

5.00

Tunisia

BCT Key Rate

7.00

Up 75bp (May ’22)

Up 50bp (Q3 ’22)

8.00

8.50

8.25

Jordan

Policy Rate

3.25

Up 50bp (Jun. ’22)

Up 50bp (Jul. ’22)

5.25

5.75

5.50

Lebanon

Repo Rate

10.00

Down 200bp (Dec ‘09)

None on the horizon

-

-

-

Bahrain

1-Wk deposit facil.

3.25

Up 75bp (Jul. ’22)

Up 50bp (Sep. ‘22)

4.50

4.75

4.50

Sources: Refinitiv, Capital Economics

Table 2: Currencies and Stock Markets

Currency

Latest
(11th Aug.)

Forecasts

Stock Market

Forecasts

End
2022

End
2023

End
2024

Latest
(11th Aug.)

End
2022

End
2023

End
2024

Saudi Arabia

SAR/USD

3.7567

3.7500

3.7500

3.7500

TASI

12,511

10,850

9,800

10,850

Egypt

EGP/USD

19.16

21.00

24.00

25.00

EGX30

9,974

7,800

7,300

8,300

UAE

AED/USD

3.6727

3.6725

3.6725

3.6725

DFMGI

3,388

2,900

2,475

2,825

Algeria

DZD/USD

142.4

150.0

160.0

180.0

-

Qatar

QAR/USD

3.6400

3.6400

3.6400

3.6400

QSI

13,743

11,500

10,600

11,500

Kuwait

KWD/USD

0.3063

0.3040

0.3040

0.3040

BKA

7,699

6,700

6,000

6,650

Morocco

MAD/EUR

10.59

10.75

10.25

10.00

MASI

12,023

11,450

10,700

12,150

Oman

OMR/USD

0.3840

0.3845

0.3845

0.3845

MSX30

4,621

3,950

3,550

3,950

Tunisia

TND/EUR

3.22

3.70

3.80

3.90

TUNINDEX

7,782

6,850

6,400

7,300

Jordan

JOD/USD

0.71

0.71

0.71

0.71

AMGNRLX

2,580

2,300

2,200

2,400

Lebanon

LBP/USD

1,505.7

20,000

20,000

20,000

BLSI

1,382

1,050

1,050

1,100

Bahrain

BHD/USD

0.3769

0.3761

0.3761

0.3761

BAX

1,897

1,700

1,500

1,650

Sources: Refinitiv, Capital Economics

Table 3: GDP & Consumer Prices (% y/y)

Share of

World 1

2010-19

Ave.

GDP

Consumer Prices

2020

2021

2022

2023

2024

2020

2021

2022

2023

2024

Saudi Arabia

1.2

3.5

-4.1

3.2

10.0

5.3

3.0

3.4

3.1

2.0

1.5

2.0

Egypt

1.0

3.9

1.5

7.0

3.3

4.3

4.5

5.1

5.2

14.0

12.3

8.3

UAE

0.5

2.8

-6.1

2.5

8.5

7.8

3.8

-2.0

0.1

3.8

2.0

1.8

Algeria

0.4

2.8

-5.1

3.5

4.5

3.0

2.8

2.4

7.2

9.5

5.0

4.3

Morocco

0.2

3.8

-7.2

7.9

1.8

3.3

3.8

0.7

1.4

5.3

2.0

1.3

Qatar

0.2

7.4

-3.6

1.5

4.5

3.5

2.5

-2.7

2.3

4.0

1.3

1.5

Kuwait

0.1

1.1

-8.9

1.5

9.8

4.8

3.3

2.1

3.4

4.8

3.3

2.5

Oman

0.1

4.1

-3.2

1.5

8.3

3.0

2.0

-0.8

1.5

3.3

1.5

1.5

Tunisia

0.1

2.3

-8.7

3.3

2.5

2.3

2.3

5.6

5.7

7.3

6.3

5.5

Jordan

0.1

3.2

-1.6

2.2

1.3

2.0

1.3

0.4

1.3

4.5

4.0

1.8

Bahrain

0.1

3.4

-4.9

2.2

5.8

4.5

3.0

-2.3

-0.6

3.0

0.5

0.8

Lebanon

0.03

3.8

-25.9

-14.5

2.5

2.0

2.0

84.9

154.8

125.0

20.0

10.0

Mid. East & North Africa2

3.9

3.7

-3.8

3.9

6.4

4.7

3.3

2.2

3.4

6.4

4.7

3.7

Sources: Refinitiv, Capital Economics. 1) % of GDP, 2021, PPP terms (IMF estimates). 2) Regional inflation aggregate excludes Lebanon.


James Swanston, Middle East and North Africa Economist, +44 (0)20 7808 4991, james.swanston@capitaleconomics.com

James Swanston Middle East and North Africa Economist
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