STANDPoint

Egypt / Strategy Note / STANDPoint Portfolio Update

So far, the year 2023 has proven to be more than just a year of adjustment, not only locally but globally. The onset of what seems to be a re-run of the Global Financial Crisis (GFC) has taken many market participants by surprise. But depending on whom you ask, the picture is not all gloomy. For us, we like to stick to our rules, picking stocks for the long term at relatively cheap multiples with potential catalysts in sight. In this note, we are taking stock of our STANDPoint Portfolio (SPP) performance so far, updating its constituents, and recalibrating our outlook for the coming period.

Where do we stand and how are we doing so far?

As we illustrated in our 2023 annual strategy outlook, SPP has outperformed all main market indices since inception back in 2021. However, the market has been on a downward spiral as EGX 30 (-14.3%), EGX 70 EWI (-12.1%), and EGX 100 EWI (-13.6%) all fell in the period from 29 January through 20 March 2023. Similarly, SPP fell 16.2% over the same period, yet maintaining its long-term outperformance nonetheless. We are adding four new stocks to SPP within our three key themes: (1) beneficiaries of a high interest rate environment, (2) export-oriented businesses, and (3) companies with long USD (i.e. non-EGP) positions. We note that today, Mother’s Day, marks the first anniversary of the first major EGP devaluation seen in 2022.

What to do next?

We continue to retain the same 10 stocks we had in our SPP, namely ADIB, COMI, TALM, EKHO/A, SWDY, ORAS, OFH, ACAMD, TMGH, and ETEL. Today, we are adding four new stocks, so in total we now have 14 stocks in SPP. The new additions are Alexandria Containers Handling [ALCN], Al Ezz Ceramics & Porcelain (GEMMA) [ECAP], EFG Hermes Holding [HRHO], and Raya Customer Experience [RACC].

For the investment rationale for the four new additions, please read the full report.

Amr Hussein Elalfy

MBA, CFA

Head of Research

T +202 3300 5724

aelalfy@egy.primegroup.org

STANDPoint

Egypt / Strategy Note / 2023 Fundamental Outlook

Dear Client,

Last year, 2022, was as eventful as a year can be, not only for Egypt but for the whole world.

Globally, investors had to deal with war where least expected, Europe. Just as the world was on the verge of recovering from a 2-year mayhem resulting from a once-every-100-years pandemic, another global event took us all by surprise on 24 February 2022 when the Russia-Ukraine war broke out. This is almost two years after suffering from COVID-19, further extending global supply chain disruptions and adding another crisis into the mix: energy. All considered we should brace for weaker-than-expected global growth, a gradual fall in inflation rates which will likely continue to be elevated, and less hawkish central banks as they try to accommodate their weakening economies mostly toward H2 2023. Thus, the global investment call by many market pundits has been to overweight fixed-income and underweight equities. Regionally speaking, both emerging markets (EM) fixed-income and equities are in favor as opposed to developed markets, including Europe which is still not out of the woods yet.

Here at home, both local and foreign investors had to deal with two structural events, both relating to the value of the Egyptian pound vs. other hard currencies led by the greenback. Two rounds of EGP devaluation in late March and late October 2022 were enough to turn investors’ attention back to the macroeconomic backdrop. On the one hand, if investors got the macro picture right, they had a better chance of picking the right stocks in the right sectors at hopefully the right time. On the other hand, continued instability means volatile stock returns and hence the importance of following an active strategy.

Taking a closer look at the local market, we notice that all styles ended 2022 in the black, led by value stocks (small-, large-, then mid-cap stocks), which was our call early 2022. Still, growth and core stocks did quite well, generating double-digit returns except for small-cap growth stocks which posted a low single-digit return.

In terms of our factor analysis, it was the highly-liquid stocks that did well (+30%), followed by the liquid stocks (+25%), which were the top performers in 2021, then the illiquid stocks (+22%), the worst performer two years in a row. Also, as we correctly nailed it in 2022, dividend-paying stocks did the trick and returned a good +46% vs. only +11% for non-dividend-paying stocks. Similarly, low-volatility stocks (+31%) outperformed high-volatility stocks (+19%), a switch that we also called for last year. Last but not least, average-beta stocks (+35.5%) outperformed.

But that was last year, what about this year?

We think this year will be the year of adjustment, where investors will need to go back to their drawing boards to devise strategies that deal with more heightened volatility. So, I am not sure why we have to select stocks at the beginning of every calendar year, when investing should be an throughout all seasons. Thus, this strategy note has our 2023 fundamental outlook, where we lay out our views for Egypt’s macro backdrop, run our equity screens, and lay out our top stock picks in what we would like to consider an “all-weather” portfolio, which we dub as “STANDPoint Portfolio”. This is why we are not making sector-based calls, preferring more of a bottom-up approach.

Wishing you a prosperous year and more years to come.

—Amr

For the full report, please click here.

Amr Hussein Elalfy

MBA, CFA

Head of Research

T +202 3300 5724

aelalfy@egy.primegroup.org

STANDPoint

Egypt / Strategy Note / Outlook Update

It is often helpful to go back to the drawing board to see how old strategies have performed: what went right, what went wrong, and — more importantly — why? In this note, we would like to refer back to our STANDPoint note published on Sunday, 30 January 2022, titled Egypt Valuation Repertoire, where we laid out our strategy for 2022 in a 5 x 5 canvas. Then we update our outlook for the coming period along with our updated top stock picks.

For the full report, please click here.

Amr Hussein Elalfy

MBA, CFA

Head of Research

T +202 3300 5724

aelalfy@egy.primegroup.org

Prime Research Team

research@primegroup.org

Last Sunday, led by Prime Minister Dr. Moustafa Madbouly, the Egyptian government held a media conference to articulate its commitment to weather the current global economic storm. The conference was set out to present to the public in general and investors in specific (both foreign and domestic), how the nation plans to deal with the current global crisis, be it soaring energy and commodity prices, a stronger USD, or the Russia-Ukraine conflict. This 2-hour-long event underscored the need for a new game plan, identifying performance targets and the means through which the government will achieve them. In this note, we highlight the five key takeaways from the conference, in our view.

Amr Hussein Elalfy

MBA, CFA

Head of Research

T +202 3300 5724

aelalfy@egy.primegroup.org

Omar Roushdy

Omar Roushdy | An intern on the macroeconomics team

The CBE’s main weapon of choice: Interest rates are likely to remain the Central Bank of Egypt’s (CBE) main weapon of choice to tackle the current economic challenges as we head to another MPC meeting this Thursday. The U.S. dollar (USD), the slumbering giant, has been awakened by record-breaking inflation rates, driving the Federal Reserve to hike interest rates more than initially expected and perhaps inducing a recession in the process to tame inflation. This will put more pressure on the CBE to bring interests rates up for Egypt to regain its position as an attractive destination for foreign investors looking for decent real interest rates. Compounded with the higher-than-expected April inflation reading of 13.1% y/y, this will add more steam to the higher interest rate argument for the next MPC meeting.

We expect a 100-150bps hike on Thursday: We expect the CBE to increase interest rates in the next MPC by 100-150bps. Through this, the CBE will be sending a strong signal to the market, underscoring its ability to (1) bring down inflation to pre-pandemic levels and (2) bring real interest rates back in the positive territory by next year to encourage investment back into the local debt market, thus boosting foreign reserves and supporting the Egyptian pound (EGP). We expect inflation to peak in October 2022 at 18.4% before cooling off afterwards. We now expect inflation to average 14.1% in 2022 (up from our previous forecast of 13.0%). As fiscal years, we expect inflation to average 8.6% in FY22 and 13.8% in FY23.

Overall, we expect a cumulative 400-450bps move in 2022: By end of 2022, we expect the CBE to have hiked interest rates by a cumulative 400-450bps for the year, including the 100-150bps we expect on 19 May 2022. This leaves a total of 200bps through yearend, which should balance out the economic cooling effects of interest rates on the investment and consumption sides of the economy with a better grip on inflation. At the end of the day, this should help bring down inflation rates, resulting in a real interest rate differential that boosts foreign investment in local debt markets and helps maintain foreign reserves.

We expect EGP to stabilize in the short term: Maintaining the current USD/EGP exchange rate should bode well for some of Egypt’s importers. Since the second half of March, the Chinese yuan (CNY) has depreciated by more than 7%. Meanwhile, the euro (EUR) is approaching parity with USD, giving hope that the recent EGP depreciation may not be as hard-hitting as it seemed in March and April. This leaves us to conclude that since most of Egypt’s trading partners have depreciated their currencies, import controls may be eased, with little EGP depreciation needed, if at all. We note that China and the Eurozone are Egypt’s main trading partners with Egyptian exports mainly spanning fertilizers, oil, and gas, all of which have been seeing massive spikes in their global demand. On the other hand, Egyptian imports continue to become cheaper as many currencies depreciate against USD, which means Egypt’s import bill will likely be lower than initially anticipated. Thus, it is too early to see how all of this will impact Egypt’s current account deficit (CAD).

Figure 1: NIR stabilized in April 2022 after falling significantly in March 2022

Figure 2: The FX position in the banking sector necessitated the EGP depreciation

Figure 3: EGP is down 52% since devaluation in November 2016 but up 2% since January 2017

Figure 4: Inflation continues to be fueled by food inflation on high global commodity prices

Figure 5: Inflation to continue rising through October 2022 before slowing down

Figure 6: Real interest rates to stay negative for the remainder of the year

As the world was drawing closer to claiming victory against COVID-19, another conflict erupted. With geopolitical tensions in Eastern Europe rising considerably, the global economy's outlook turned toward an uncharted path of conflict and sanctions. With unstable inflation forecasts, longer-than-expected supply chain disruptions, and pandemic-induced commodity market imbalances, worldwide already-uneven recovery from the COVID-19 repercussions was already precarious. Furthermore, the latest lockdown wave in China has reminded us that pandemic threats are not out of the picture just yet, and the world must brace itself for COVID's long-term shadows.

Mona Bedeir

Chief Economist

T +202 3300 5722

MBedeir@egy.primegroup.org

The current account deficit (CAD) in Q2 FY22 improved on both annual and quarterly basis, thanks to relative improvements in the trade deficit, a rebound in the services balance, and high remittance inflows. CAD contracted by 22% y/y in Q2 FY22 after expanding by 44% y/y in Q1 FY22, leading to a deficit of USD3.8bn. On a quarterly basis, CAD also declined by 5% q/q, but at a slower pace than the 22% q/q fall in Q1 FY22. The following factors influenced CAD in Q2 FY22:

(1)    For the first time since Q1 FY21, the trade deficit fell, albeit marginally. Trade deficit declined by 0.1% y/y on a considerable rise in exports (+78% y/y to USD11.8bn vs. +41% y/y in Q1 FY22). Meanwhile, imports also increased but at a relatively slower pace (+30% y/y vs. +34% y/y in Q1 FY22), although they remain at historic highs of USD22.5bn.

(2)    In Q2 FY22, LNG exports staged its greatest recovery. The hydrocarbon trade balance improved to a solid surplus of USD2.2bn from a deficit of USD101mn in Q1 FY22. Hydrocarbon exports set a new historical high of USD5bn (vs. USD2.9bn in Q1 FY22) on higher LNG prices and volumes.

(3)    Annual non-hydrocarbon trade deficit growth moderated in Q2 FY22 (+22.6% y/y vs. +26% y/y in Q1 FY22), owing principally to a 46% y/y increase in non-hydrocarbon exports (vs.+27% y/y in Q1 FY22), reaching USD6.8bn. Meanwhile, imports continued to grow at a substantially high rate, increasing by 30% y/y to USD19.6bn. Non-hydrocarbon trade deficit remained at an all-time high of USD12.8bn, driven mainly by higher global commodity prices.

(4)    Service surplus grew at a slower pace due to an increase in service payments. Service surplus reached USD2.7bn in Q2 FY22 (vs. USD2.9bn in Q1 FY22 and only USD1mn in Q2 FY21), helped by a strong rebound in the tourism sector, which generated USD3bn (vs. USD2.8bn in Q1 FY22 and only USD987mn in Q2 FY21). Suez Canal revenues remained almost flat q/q but grew 11% y/y to USD1.7bn. Meanwhile, service payment surged by 50% y/y to USD4bn, driven by Egyptians’ pent-up demand for travel.

(5)    The deficit in investment income continue to weigh on CAD, growing by 36% y/y in Q2 FY22 vs. 27% y/y in Q1 FY22, driven by a 48% y/y increase in investment income payments, including earnings of foreign corporates in Egypt and interest payments.

(6)    Remittances slipped in Q2 FY22, in line with our expectations. Remittances fell by 0.8% y/y to USD7.3bn vs. USD7.5bn in Q2 FY21 and USD8.1bn in Q1 FY22.

(7)    As global tightening circumstances forced FPI to report a net outflow for the first time since Q1 FY21, CAD was financed by net borrowing and other investment. Net FPI inflows fell further, with a net outflow of USD6bn compared to a net inflow of USD3.6bn in Q1 FY22. Egypt lost USD3.6bn in capital outflows from the T-bills in Q2 FY22, owing to a major shift in the Fed's monetary stance. Meanwhile, FDI declined by 8.7% y/y to USD1.6bn in Q2 FY22 (42% of CAD), after increasing by 4% y/y to USD1.7bn in Q1 FY22.

Mona Bedeir

Chief Economist

T +202 3300 5722

mbedeir@egy.primegroup.org

Mounting External Vulnerabilities

The EGP depreciation of March was unavoidable, and NIR figures were just the tip of iceberg. Egypt's net international reserves (NIR) fell for the first time in almost two years by USD3.9bn to USD37.1bn by end of March. The fall came to reveal the sizeable pressures on the country’s external balance, prompting the monetary authority to deploy c.91% of its SDR stock in NIR. The country's existing SDR stock as of March 2022 is close to where it was before the IMF's latest SDR allocation in August. Furthermore, the stock of foreign currency declined by USD1.0bn to USD29.1bn, the lowest level since June 2017. However, the stock of gold remained at a high record of USD7.8bn, up from USD6.9bn, driven by higher prices by end of March 2022. Despite the drop, NIR still covers more than five months of imports.

For the full report, please click here.

Mona Bedeir

Chief Economist

T +202 3300 5722

MBedeir@egy.primegroup.org

Much Higher Inflation … and Longer

The first figure in double digits since May 2019, March’s annual urban headline inflation came well above the CBE’s target. Annual urban headline inflation accelerated to +10.5% y/y in March from +8.8% y/y in February 2022, owing to a cocktail of an unfavorable base-year effect, demand seasonality induced by Ramadan, and the effect of higher global commodity prices—primarily food. The acceleration in inflation came to reflect the sustained rise in food basket inflation at +19.7% (vs. +17.6% y/y in February) and non-food inflation to +6.5% y/y (vs. +4.9% y/y in January), the strongest non-food inflation figure in over a year. The sharp increase in wheat prices triggered by the Ukrainian crisis and its influence on supply accelerated bread and cereals basket inflation to +19.1% in March (vs. +9.4% y/y in February). Meanwhile, inflation in most food basket constituents rose in March, except for volatile fruit and vegetable (+5.9% y/y and +32.6% y/y compared to +12.4% y/y and +41.9% y/y in February, respectively). Meanwhile, non-food inflation was mostly driven by increasing housing and utility expenses as a result of rising costs for domestic and commercial butane gas cylinders, which also boosted hotel and restaurant prices.

For the full report, please click here.

Mona Bedeir

Chief Economist

T +202 3300 5722

MBedeir@egy.primegroup.org

At its highest reading since mid-2019, annual urban headline inflation in February came well above our expectations. Annual urban headline inflation surged to +8.8% y/y in February from +7.3% y/y in January 2022, owing to an unfavorable base-year effect, fuel price hike, and the ongoing effect of globally higher prices of commodities, primarily food. The acceleration in inflation reflects a continued increase in food basket inflation which stood at +17.6% y/y (vs. 12.4% y/y in January), while non-food inflation edged down to +4.9% y/y (vs. +5% y/y in January). The inflation of most of the food basket components accelerated in February, except for a slight fall in the cooking oil and fat basket (+33.2% y/y vs. +34% y/y in January). This reflected not only the seasonality of Ramadan, which historically puts additional pressure on food prices, but also the fear and panic caused by the escalating Ukrainian crisis, which prompted food stockpiling and increased price pressure. Meanwhile, non-food inflation was driven mainly by increased transportation inflation due to fuel price hikes in addition to the higher contributions of most of other baskets save for housing and utility.

For the full report, please click here.

Mona Bedeir

Chief Economist

T +202 3300 5722

MBedeir@egy.primegroup.org

The external environment is exerting increasing pressure on the country's external position. Egypt's official net international reserves (NIR) remained stable at USD40.99bn in February 2022, having increased by only USD14mn. Despite the marginal increase, the breakdown revealed pressures on NIR's foreign currency liquidity stock, which fell by USD2.56bn, the most since August 2021. Foreign currency reserves have fallen to USD31.59bn, the lowest level since July 2017. The significant decline in foreign currency was largely offset by the appreciation of gold, which increased by USD2.7bn in February to a record high of USD6.9bn. However, we believe that the significant increase in gold indicates that the CBE has accelerated the shift away from the USD (which currently accounts for the majority of the CBE's foreign currency reserves) toward gold in order to build more resilient buffers for the upcoming Fed monetary tightening. Meanwhile, the SDR stock fell by USD134mn to USD2.5bn. We believe that the marginal increase in reserves continues to reflect pressures on foreign currency inflows caused by growing fears of global tightening conditions and a rising commodity price outlook fueled by the escalating geopolitical conflict between Russia and Ukraine in the Black Sea. The overall level of foreign reserves increased by USD14mn in February, as the stock of non-official reserves stabilized at USD9.18bn by the end of the month.

For the full report, please click here.

Mona Bedeir

Chief Economist

T +202 3300 5722

MBedeir@egy.primegroup.org

Read in PDF

The far-reaching consequences of a second cold war extend beyond the borders of Russia and Ukraine, threatening global recovery. The simmering conflict in the Black Sea has now flared up. Russia launched a full-scale invasion of Ukraine on several fronts, and in retaliation, the U.S. and the European Union (EU) announced another round of extreme sanctions, including banning Russia’s major banks from using the SWIFT system. Russian ambitions at this stage paint many scenarios, all far from rosy for the world economy and for net commodity importer countries, in general. But for Russia, the EU's reliance on the country’s fuel provides it with great leverage to withstand the sanctions. Moreover, Russia and its allies in Asia (mainly China) could seize the opportunity to bolster their non-dollar denominated trade and financial ties, by using SPSF, the Russian equivalent of SWIFT, or by accelerating the use of  China’s CIPS system to cushion the effect of losing access to SWIFT.

For the full report, please click here.

Mona Bedeir

Chief Economist

T +202 3300 5722

MBedeir@egy.primegroup.org

A Soothing Message From the CBE … and Our Takeaways

Yesterday, the Central Bank of Egypt's (CBE) Deputy Governor Ramy Aboul Naga hosted a virtual conference call (webinar) to review recent macroeconomic trends and key projections. The call came in three parts: (i) major recent developments; (ii) the CBE’s outlook for the Egyptian economy in 2022; and (iii) a Q&A session that tackled hot topics.

For the full report, please click here.

Mona Bedeir

Chief Economist

T +202 3300 5722

MBedeir@egy.primegroup.org

Ebb and Flow

Thanks to a recovery in the services balance, the current account deficit (CAD) in Q1 FY22 improved quarterly, yet was annually pressured by higher global commodity prices which still weighed on its annual reading. CAD widened by 44% y/y (vs. 34% y/y in Q4 FY21), resulting in a USD4bn deficit in Q1 FY22. On a quarterly basis, CAD fell 22% q/q in Q1 FY22, more than double the pace compared to the 9% q/q slide recorded in Q4 FY21.

For the full report, please click here.

Mona Bedeir

Chief Economist

T +202 3300 5722

MBedeir@egy.primegroup.org

The highest reading in two years, January’s annual urban headline inflation above our expectations: Fueled by the unfavorable base-year effect, upward adjustment in some of subsidized food items, in addition to the last cold wave effect on vegetable prices, annual urban headline inflation surged to +7.3% y/y in January 2022 (vs. our expectations of +6.9% y/y) from +5.9% in December 2021. The acceleration in inflation came to reflect the continued increase in both food basket inflation at +12.4% y/y (vs. +8.4% y/y in December) and non-food inflation at +5% y/y (vs. +4.6% y/y in December). The increase in annual food prices was driven by inflation in: (1) bread and cereals (+7.2% y/y vs. +5.5 % y/y in December); (2) dairy and eggs (+12.9% y/y vs. +11.3% y/y in December); (3) vegetables (+17% y/y vs. -6.9% y/y in December); and (4) sugar and related products (+17.7% y/y vs. +5% y/y in December). Non-food inflation also remained on an upward trajectory, driven mainly by the higher contributions of housing and utility baskets and clothing baskets.

For the full report, please click here.

Mona Bedeir

Chief Economist

T +202 3300 5722

MBedeir@egy.primegroup.org

Global headwinds accumulated, but buffers were tuned to smooth the pressures. Egypt’s official net international reserves (NIR) stabilized at USD40.99bn, having inched up by USD50mn in January 2022. The marginal uptick was attributed to a USD85mn increase in the stock of foreign currency, standing at USD34.14bn vs. USD34.06bn at end of December 2021. Meanwhile, both stocks of gold and SDRs fell by a total of USD39mn. We believe January’s slight increase in reserves is quite orchestrated as it comes amid higher pressures on FX inflows driven by  growing fears of global tightening conditions and a higher commodity price outlook. The fall in the stock of  non-official reserves in January also supports this view, having fallen by USD2.54bn to stand at USD9.18bn – the lowest level in four months. We believe the drop was due to repayment of a USD2.5bn Eurobond due in January 2022. Overall reserves ended January at USD50.17bn (+10% y/y). 

For the full report, please click here.

Mona Bedeir

Chief Economist

T +202 3300 5722

MBedeir@egy.primegroup.org

While the Fed’s March rate hike looks like a done deal, the CBE will likely kick off its first 2022 meeting with a cautious rate-hold decision. However, we still think the CBE’s preemptive tightened monetary policy will begin in 2022 – most likely in H2 2022, given what seems a more-aggressive-than-expected hawkish Fed. The Monetary Policy Committee (MPC) heads into its first meeting in 2022 this Thursday with forward-looking expectations still anchored around its target. As a result, there is still room for the CBE to maintain its current monetary stance.

For the full report, please click here.

Mona Bedeir

Chief Economist

T +202 3300 5722

MBedeir@egy.primegroup.org

2021, a year of divergence

Last year, 2021, will go down in history as yet another extraordinary one for the Egyptian Exchange (EGX). Not only has it seen the market’s two indices diverge in terms of performance, but it also saw a total change of direction at the same time. First, EGX 30 had been hitting a negative note from the beginning of the year until Q4 2021, while EGX 70 EWI delivered a high-flying performance through 8M 2021. Then, EGX 30 pared all its losses since the start of the year to close the year up 10.18% at 11,949.18, while EGX 70 EWI almost wiped out all its gains for the year to close up only 2.64% at 2,201.79. EGX 30 reached its 52-week high of 11,950.34 on 29 December 2021, 0.4% shy of hitting the 12,000 psychological mark—a level we haven’t seen since early March 2020. On the other hand, EGX 70 EWI has witnessed the rise and demise of many of its components, mainly driven by speculative trading behavior that was further fueled by margin trading. This lent itself to a heightened level of volatility that pushed stock prices to unprecedented levels before succumbing to the pressure of forced sales instigated by margin calls.

2022, a year of convergence?

But now that this is all behind us, the question is: How can we bring the lessons we learned from 2021 into 2022? We think 2022 will be a year of convergence between market prices and intrinsic values. What happened in 2021 – in our opinion – will not be repeated in 2022 because we will have a new game in town that will lead to the said convergence in certain stocks.\

In this note, we look back at the year that has been and look ahead to the year to be, guided by our macro and stock views and ending up with what we call Egypt Valuation Repertoire, where certain Egypt stocks present deep valuation levels and in some cases absurdly so.

For more details, please download the full report.

As expected, annual urban headline inflation was up in December after two months of disinflation: A combination of the unfavorable base-year effect and lagging global-driven inflationary pressures put annual inflation right back on the rise, which is likely to continue hovering around 6-7% in Q1 2022. In December, urban headline inflation increased to +5.9% y/y (vs. +5.6% y/y in November 2021), slightly lower than our forecast of +6.1% y/y. The increase was mainly attributed to the acceleration in both food basket inflation at +8.4% y/y (vs. +8.1% y/y in November) and non-food inflation at +4.6% y/y (vs. +4.3% y/y in November). Driven by global prices, the increase in annual food inflation is concentrated mainly in four baskets. Bread and cereals (+5.5% y/y vs. +4.6% y/y in November); dairy and eggs (+11.3% y/y vs. +10.7% y/y in November); edible oil and fats (+34.6% y/y vs. +33.7% y/y in November); and sugar and related products (+4.7% y/y vs. +5% y/y in November). Meanwhile, the decline in vegetable prices eased to -9.6% y/y (vs. -12.3% y/y in November), and fruit inflation fell further to +10.85% y/y (vs. +15.1% y/y in November). Non-food inflation also came to reflect global pressures as the inflation of gas and fuel (sub-basket of housing and utility basket) rose following the government’s decision to hike prices of subsidized butane gas cylinders, which also affected food catering services inflation.

For the full report, please click here.

Mona Bedeir

Chief Economist

T +202 3300 5722

MBedeir@egy.primegroup.org

Will the one swimming against the current survive? The historic plunge of the Turkish lira (TRY) in recent months against USD (falling as much 55% ytd by end of 17 December 2021) raises a lot of questions about the soundness of the Turkish central bank's unorthodox policies which focus on nothing but growth at a time when inflation and its expectations are obviously beyond targets. Aside from politics and the Turkish central bank’s credibility, the Turkish case adds more fuel to risk metrics of emerging markets (EM), especially for countries sharing Turkey’s same characteristics, i.e. suffering from a chronic trade deficit, relying on external funding, CAD, and an unfavorable debt structure, which entails substantial exchange rate and interest rate risk. While the export-focused growth formula is not new and has been tested in Asia, Turkey’s policymakers face numerous obstacles that will likely stymie their efforts to achieve the same results. On top of all that, even according to economic literature, currency depreciation will not immediately improve the trade deficit but will actually worsen it in the short term. Also, timing is critical for a country grappling with historically-high inflation rates. Lastly, TRY will remain under the pressure of the high prices of imports needed for sticking to President Erdogan’s plan and the debt burden that surpasses FX reserves (c.108% of reserves).

Mona Bedeir

Chief Economist

T +202 3300 5722

mbedeir@egy.primegroup.org