Egypt's Central Bank is set to maintain its key interest rates following a significant hike earlier this month, according to Fitch Ratings. The move comes as the North African nation grapples with soaring inflation, with expectations pointing towards rates remaining steady for the remainder of the year. Fitch's assessment underscores the Central Bank's commitment to curbing inflationary pressures, as Egypt navigates through a pivotal phase in its economic trajectory.

With expectations of inflation possibly slowing to below 25% on a yearly basis in February, the rate hike was deemed sufficient to restore positive real interest rates. Even with the currency float, inflation is expected to hover around 30.0% until 2024, keeping real interest rates close to positive territory.

Meanwhile, Fitch's report clarified that government bond yields will also turn positive, and with foreign exchange risks diminishing, this will lure portfolio investors back into Egyptian debt markets sooner than anticipated.

However, the agency anticipates exchange rate volatility in the short term until the market adjusts to the long-awaited currency depreciation. While the exchange rate is currently weaker than the long-anticipated range of 40.00 to 45.00 Egyptian pounds per US dollar, it remains close to the 50.00 Egyptian pounds per US dollar mark.

Expectations regarding the currency value in the short term will depend on the amount of foreign currency the Egyptian Central Bank will provide through banks, but estimates suggest that the exchange rate will stabilize near 50.0 Egyptian pounds per US dollar by the end of the year if portfolio investments materialize as expected.

The agency believes that the authorities will have sufficient foreign currencies to bridge the gap quickly with the widely-used parallel market rate.

Egypt secured the first tranche of a new investment deal with the United Arab Emirates (worth $10 billion), and more is expected in the short term through a new program with the IMF and remittances. Portfolio investment flows.

With monetary policy tightening and currency flotation, Egypt has now met the fundamental requirements for a larger IMF program, as the announced measures have been adopted as part of a set of comprehensive economic reforms in coordination with the government, with steadfast support from multilateral and bilateral partners.

The recent measures taken by Egyptian authorities to attract foreign financing are expected to help Egypt meet its medium-term financing needs. Investors share this view, leading to a decline in credit default swaps for euro-denominated bonds for a 5-year term.

However, for the risk perception to remain lower, authorities need to swiftly advance privatization and structural reforms to improve the business environment and attract sustainable financing and foreign direct investment.

While portfolio investments will alleviate short-term pressures, they will make Egypt vulnerable to investor sentiment fluctuations in case of shocks.

Geopolitical risks arising from the war between Israel and Hamas and the Red Sea crisis remain high and pose a danger to overall economic stability in Egypt.

The agency believes that the political risks arising from the announced measures will remain under control, as the crackdown on currency traders and speculators and positive news (such as the recent UAE investment deal) have bolstered the Egyptian pound in the parallel market from around 75.0 Egyptian pounds per US dollar in January 2024 to around 50.0 Egyptian pounds per US dollar.

The psychological impact of the currency's appreciation in the widely-used parallel market has had a positive effect on Egyptians, as they will purchase dollars at an official rate much stronger than the parallel market rate of 75 Egyptian pounds per US dollar. This has made currency flotation more socially acceptable.

The agency maintains its expectations that economic growth will slow from 3.8% in the fiscal year 2022/2023 to 3.2% in the fiscal year 2023/2024 before rising by 4.2% in the fiscal year 2024/2025, as greater-than-expected monetary policy tightening will lead to increased borrowing costs for companies and households, negatively impacting domestic consumption and investment.