KEY THEMES
In line with expectation, the Fed kept its target range for the federal funds rate at 0-0.25% after its two-day September policy meeting that ended yesterday. The Fed’s policy statement indicated that tapering is looming. The post-meeting statement altered the part of July’s policy statement pertaining to asset purchases pace, stating ”If progress continues broadly as expected, the Committee judges that moderation in the pace of asset purchases may soon be warranted.” This came at the time where the market is widely expecting now that the Fed will formally announce tapering in November, with the first reduction in purchases starting in December.
As for the pace of the reduction in assets purchased, the Fed’s chairperson said, “as long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate.” Unlike the 2013-2014 tapering episode, which continued for almost a full year, the Fed is widely expected to opt for a shorter period given that the market is now well prepared and the risks around inflation are higher, compared to the last tapering attempt. This made some FOMC members more willing to raise rates earlier than expected with the first-rate hike now expected to take place in 2022.
Here at home, as for most of the EMs, the concern with tapering is the potentially disruptive capital outflows as carry trade activity will be unwound. However, not all EMs are in one basket. We have to remember that EMs are now more heterogeneous than years ago, and their vulnerability to the U.S. hawkish monetary policy is not merely a function of classic factors, such as high external debt and high domestic private sector foreign currency debt. Other factors can play out, including the economic resilience at the time of the COVID-19 crisis and a balanced economic policy stance that boosted the capacity to absorb shocks, which came all in favor of Egypt.
Egypt now is standing on a stronger footing compared to the last tapering after the successful implementation of the economic reform in 2016. Furthermore, the rebuilding of FX buffers post the peak of the pandemic in 2020 is another good notion. However, in the face of the tapering storm, we do expect the CBE to keep its current accommodative monetary stance steady for the rest of the 2021 and 2022, if inflation expectation remains well anchored around the CBE’s target. In addition, Egypt will likely be more active this year and early 2022 in tapping international markets to meet its growing financing needs, including international bonds market, sukuk market, and green bonds.