A recent research note issued by London-based Capital Economics said that the recent decline in Egyptian local currency bond yields probably has further to run, after the Central Bank of Egypt (CBE) embarked on an easing cycle earlier this month.
Egyptian local currency bond yields have dropped by 450-565 basis points (bp) since they peaked in the middle of last year.
Yields have fallen across the curve. This has come on the back of a sharp fall in inflation—the headline rate fell from a 30-year high of 33.0% year-over-year (y-o-y) in July to 17.1% y-o-y in January.
Inflation spiked in the first half of 2017 following the pound’s 50% devaluation against the dollar, hikes in administered prices, and the introduction of a value added tax. But the impact of all of those factors is now unwinding.
The CBE’s Monetary Policy Committee (MPC) began an easing cycle, cutting its overnight deposit rate by 100 bp to 17.75%. That partially unwinds the 700 bp of rate hikes that were implemented since the authorities announced a shift to a floating exchange rate regime.
The report also noted that the decline in inflation and interest rates has further to run.
“The impact of the pound’s devaluation will continue to fade. And there are a number of other reasons to think that inflation will continue to ease over the coming years. After several years of sluggish growth, there is probably some spare capacity in the economy, which will keep a lid on underlying price pressures.”
Meanwhile, the report added that the central bank has stopped monetising the budget deficit.
The report mentioned that the MPC’s drive to improve its inflation-fighting credibility means that policymakers will probably not respond to falling inflation through a brief series of steep rate cuts. Instead, a prolonged—but still substantial—easing cycle is more likely.
“We have pencilled in a further 650 bp of rate cuts, to 11.25%, by the end of 2019, which is more easing than most currently anticipate. Accordingly, a further decline in local currency bond yields seems likely. For our part, we think that 10-year bond yields could drop to 12.00% by the end of 2019, from around 14.25% at present,” Capital Economics said.
In contrast to local currency bonds, yields on Egypt’s dollar bonds have risen over the past month.
However, that did not prevent Egypt from selling $4bn of international bonds.
The issuance was three times oversubscribed and was split into three tranches—$1.25bn was sold at a five-year maturity, $1.25 at 10 years, and $1.5bn at 30 years.
Yields were actually below those Egypt paid at its last dollar bond sale a year ago due to a narrowing of spreads.
The proceeds will cover around a tenth of Egypt’s gross external financing requirement over the next twelve months.