EGYPT ECONOMIC UPDATE: INFLATION FALLS, GROWTH

UNCLAS CAIRO 000476 SIPDIS DEPT FOR NEA/ELA TREASURY FOR BRYAN BALIN AND FRANCISCO PARODI E.O. 12958: N/A TAGS: ECON EAID EFIN EINV PGOV EG SUBJECT: EGYPT ECONOMIC UPDATE: INFLATION FALLS, GROWTH SLOWS, GOE INTERVENES TO SUPPORT THE POUND ¶1. (U) Key Points -- The Egyptian Central Bank buys $1 billion in Egyptian pounds to support the currency. -- Inflation dropped again in February, but vendors are slow to lower food prices. -- GDP growth continues to slow. -------------- --- The Central Bank Intervenes to Support the Pound -------------- --- ¶2. (U) On March 15, the Central Bank of Egypt (CBE) reportedly bought $1 Billion in Egyptian pounds, driving the rate from nearly 5.7 EGP/USD to 5.62. This is the largest intervention in recent memory by the CBE (normal daily EGP interbank trading is around $400 million) and amounts to approximately 3% of the CBE's foreign reserves. Since its recent peak in August 2008, when the pound traded at 5.3 EGP/USD, the currency has lost more than 6.5% of its value. Despite this intervention there is general consensus among economists and analysts that along with Egypt's slowing economy and increasing current account deficit, a gradual weakening of the pound over the next year is very likely (estimates range from 5.8-6.1 EGP/USD). ¶3. (U) While the CBE will rarely publicly acknowledge intervening in the foreign exchange market, the move by the CBE should be seen as an effort to show that the GOE will intervene if it sees too sudden a decline in the pound. Egypt's foreign reserve position, often cited by Egyptian officials as evidence of its strong economy, remains strong at $33 billion, more than twice what it was four years ago. Analysts at Beltone Financial in Cairo expect that the reserve position will be $27 billion towards the end of the year. According to Beltone, Hisham Ramez, the Deputy Governor of the CBE, has said that the CBE would intervene again, if the exchange rate slides "unjustifiably" because of speculation. -------------- Inflation -------------- ¶4. (U) Inflation in Egypt continues to drop. The urban inflation rate in February was 13.5% on a year-on-year basis, down from 14.4% y/y in January. As food prices continue to decline, the expectation is that inflation should drop into single digits in the second half of 2009. Despite the drop in global commodity prices over the last year, local prices -- particularly for food -- have fallen more slowly as vendors are reluctant to lower prices because of a desire to maintain wider profit margins and, in many cases, until they have sold off higher-cost inventories. ¶5. (U) At the February meeting of the CBE's Monetary Policy Committee (MPC),the CBE lowered its overnight deposit rate to 10.5% and its lending rate to 12.5%. As inflation continues to drop, it is widely expected that the CBE will make further rate cuts in its overnight lending rates. The next MPC meeting is scheduled for March 26. -------------- Growth Estimates Are Lowered -------------- ¶6. (U) According to preliminary GOE reports on Q2 2008/9 (Oct.- Dec. 2008),annual GDP growth slipped to 4.1% during the period which is a marked decline from the 7.7% annual growth rate in the same period a year ago and 5.8% in Q1 2008/9. Though estimates vary widely, some expect that the growth rate from Q3 and Q4 will be near zero and may even show a slight contraction. Analysts at Beltone Financial tell us that, even with expanded GOE fiscal spending through its stimulus plans, GDP growth will continue to slow in FY 2009/10. ¶7. (U) Youssef Boutros Ghali, Egypt's Minister of Finance, has publicly acknowledged that economic growth in the 2008/9 fiscal year would be in the 4-4.5% range. He also said that he expects the Egyptian economy to show signs of recovery in 8-9 months. Boutros Ghali's estimate is more optimistic than that of many analysts, most of whom have lowered their GDP growth forecasts for fiscal year 2008/9 (July-June) to 3-3.5% and expect even slower growth in the 2009/10 fiscal year in the range of 2-2.5%. SCOBEY