Price Controls To Have Negligible Impact

BMI View: We do not expect the price controls announced by Egypt's interim government to have a significant impact on the country's inflation. Indeed, the measure will be restricted by the potential for a black market to emerge as well as our expectation for further currency devaluation . In addition, the government's expansionary monetary policy will also mitigate the price controls' effectiveness. We maintain our forecast for headline inflation to reach 11.0% by the end of 2013, averaging 9.5% over the course of the year .

The price controls on certain foods announced by Egypt's interim government will have a negligible impact on the country's inflation rate. The Minister of Supply , Mohamed Abu-Shadi , has ordered grocers to reduce prices, or he will set prices and allot them a profit margin of 25 % . The practicalities of the policy have yet to be clarified, or indeed which foodstuffs will be affected. Food has been targeted as they the largest contributor to inflation (with a weighting of 40% of the basket), accounting for over half the increase in August. Indeed, food price inflation has been a constant pull on the headline CPI basket over the last two years.

We do not expect the policy to have a significant impact on CPI for several reasons. First, its effectiveness will be reduced as a black market is likely to spring up, as official supply is reduced in line with prices. Unless the interim government threaten and enforce significant fines for such trading, a parallel market will likely take hold, as has been the case with subsidised fuel.

Food Prices An Obvious Target
Egypt - Composition Of CPI Basket

Price Controls To Have Negligible Impact

BMI View: We do not expect the price controls announced by Egypt's interim government to have a significant impact on the country's inflation. Indeed, the measure will be restricted by the potential for a black market to emerge as well as our expectation for further currency devaluation . In addition, the government's expansionary monetary policy will also mitigate the price controls' effectiveness. We maintain our forecast for headline inflation to reach 11.0% by the end of 2013, averaging 9.5% over the course of the year .

The price controls on certain foods announced by Egypt's interim government will have a negligible impact on the country's inflation rate. The Minister of Supply , Mohamed Abu-Shadi , has ordered grocers to reduce prices, or he will set prices and allot them a profit margin of 25 % . The practicalities of the policy have yet to be clarified, or indeed which foodstuffs will be affected. Food has been targeted as they the largest contributor to inflation (with a weighting of 40% of the basket), accounting for over half the increase in August. Indeed, food price inflation has been a constant pull on the headline CPI basket over the last two years.

Food Prices An Obvious Target
Egypt - Composition Of CPI Basket

We do not expect the policy to have a significant impact on CPI for several reasons. First, its effectiveness will be reduced as a black market is likely to spring up, as official supply is reduced in line with prices. Unless the interim government threaten and enforce significant fines for such trading, a parallel market will likely take hold, as has been the case with subsidised fuel.

Second, i nflation will push higher on the back of FX weakness as we forecast the currency to depreciate from the current spot rate of EGP6.854 4/US$ to EGP7.3000/US$ by the end of 2013 .

Another factor which will support inflationary pressures is the decision by Egypt's Monetary Policy Committee to unexpectedly voted to lower interest rates by 50 basis points in September . This move highlights that the interim government will pursue expansionist policies rather than austerity in a bid to resolve the country's economic malaise , which, while lower ing the cost of funding for businesses, will provide upside support to inflation .

Food Prices Pulling Up Inflation
Egypt - Headline & Food Inflation %

Given our expectation for the effectiveness of price controls to be minimal we maintain our inflation forecasts. We currently forecast headline inflation to reach 11.0% by the end of 2013, averaging 9.5% over the course of the year. This forecast is higher than Bloomberg consensus which expects inflation to average 8.25% over 2013. Looking further ahead, w e expect inflation to peak around the start of 2014 and average 10%, primarily due to our expectation for food prices to decline on the back of lower commodity prices . The key risk to this view is the timing of the reduction in energy and possibly food subsidies, which will cause a significant spike in headline print. We do not expect a significant reduction in subsidies until after a new government is elected which will likely be during or after Q214.

Inflation To Peak In 2014
Egypt - Headline CPI

Government Taking More Interventionist Line

The government's policy regarding food prices not only indicates attempts to control inflation, but also hints that the interim government plan s to take a more interventionist line with the economy than the Muslim Brotherhood or former President Hosni Mubarak did. Indeed, government-imposed prices are reminiscent of the policies of Gamal Abdel-Nasser in the 1950s and 1960s, a system which lasted until the early 1990s. The problem for the government is that measures such as this, once implemented, are difficult to reverse, which could elevate political risks down the line

×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.

×

REQUEST A DEMO

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.

Thank you for your interest

A member of the team will be in touch shortly to arrange a convenient time for your free demonstration and trial. If your enquiry is urgent, please email our Client Services team here.