Egypt cuts interest rates

On Friday, May 15, Egypt’s central bank cut overnight deposit rates by 50bps to 9.5% and its overnight lending rate by 100bps to 11%. In its statement, the central bank said that the narrowing of the corridor of the deposit rate and lending rates was appropriate as “the dire prospects for global growth in 2009 are likely to exert further downward pressures on external demand with unfavorable repercussions on the domestic growth outlook”.

As expected, Egypt’s central bank cut rates for a third time this year. The bank has responded aggressively to the economic slowdown by loosening monetary policy. With inflation on the decline, 11.7% in April 2009 coming off its peak of 24% in August 2008, the central bank has room to cut interest rates even further. We expect the central bank to do just that, cutting the overnight deposit rate to 9% by the end of Q2-2009.

The central bank is acting to stimulate a sluggish economy. GDP in Q3 FY09 reached 4.3% y/y v. 7.4% y/y the same period last year. Key revenue generating sectors, tourism and shipping i.e. Suez Canal revenues have been heavily affected by the global economic slowdown. In January 2009, Suez Canal receipts were down 19.7% y/y while hotel bookings are down more than 30% y/y in January 2009. Hotel occupancy rates in key resorts hover around 50-60% compared to their 90% usual occupancy rates. In addition to the central bank’s measures, the government plans to spend an additional USD 3bn in the second half of the year to extend its economic stimulus package, widening the budget deficit to almost 8% of GDP in FY10 v. the expected 6.8% in FY09 which ends in June 2009. The government has prioritized growth above all else. We expect growth to average 3% this fiscal year.END