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IMF Seen Signaling Preference for Higher Egypt Borrowing Costs

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  • IMF Seen Signaling Preference for Higher Egypt Borrowing Costs

Interest rates and fiscal measures are among the tools Egypt could use to control one of the highest inflation rates among emerging markets, a senior International Monetary Fund official said, creating speculation the Washington-based lender is recommending higher borrowing costs.

“Available monetary and fiscal policy instruments, including interest rates, can help to contain inflation,” Jihad Azour, director of the fund’s Middle East and Central Asia department, said in an emailed response to questions. At a press conference on Friday, Azour said interest rates are “the right instrument” to manage Egypt’s inflation. “This is something that we are discussing with the authorities,” he said.

The comments come at a time when some Egyptian officials as well as economists point to a slowing pace of price increases as a sign that inflation may be peaking. Capital Economics, a London-based consultancy, said April 10 that “the central bank is unlikely to tighten monetary policy further.”

Consumer price inflation surged to more than 30 percent after Egypt floated the pound and reduced fuel subsidies in November, steps that helped the country secure a $12 billion, three-year IMF loan program to ease a dollar shortage that had crippled business activity. On the same day it removed currency controls, the central bank raised interest rates by 300 basis points to 14.75 percent. The Monetary Policy Committee is scheduled to meet next on May 18.

Reading the Signs

“The messages coming out of the IMF allude to a recommendation of an interest rate hike to curb inflation,” said Reham El-Desoki, senior economist at Dubai-based investment bank Arqaam Capital. “We do not, however, believe that such a move would reduce inflation in Egypt” because the surge was caused by price shocks and “base effects” relating to the level of inflation a year ago, she said.

“The headline inflation rate will gradually decline as the effect of both tapers off,” she said.

While the pace of price gains moderated in March, IMF Managing Director Christine Lagarde said on Thursday that Egyptian policy makers need to put a “special focus on inflation.” The IMF plans to send a mission to Cairo on April 28 to review the loan accord’s implementation before releasing a second installment of the financing, Egyptian officials have said.

The program aims to restore investor confidence in an economy battered by turmoil since the 2011 Arab Spring uprisings. Authorities are attempting to bolster economic growth while reducing a budget deficit that’s above 10 percent of gross domestic product.

Recovery Time

“An interest rate hike would just increase the cost of funding for the government and private sector, and lengthen the recovery time of the Egyptian economy,” El-Desoki said. “It would make Egyptian fixed income more attractive but would be negative for the stock market and private corporate investment.”

Finance Minister Amr El-Garhy said on the sidelines of the IMF spring meetings in Washington on Thursday that “discussions are going on” between Egyptian authorities and the IMF.

“While headline inflation year-on-year is high, the pace of price increases month-on-month is moderating,” he said in an interview. In March, consumer prices rose 2 percent on a monthly basis, down from 2.6 percent in February and 4.1 percent in January.

Separately, the IMF said it will also hold talks with authorities over fuel-subsidy cuts.

“We will need to discuss with the government the sequencing of measures to achieve their goal of eliminating subsidies on most fuel products during the program period,” Azour said.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Crude Oil

Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

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Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

Oil retreated from an earlier rally with investment banks and traders predicting the market can go significantly higher in the months to come.

Futures in New York pared much of an earlier increase to $63 a barrel as the dollar climbed and equities slipped. Bank of America said prices could reach $70 at some point this year, while Socar Trading SA sees global benchmark Brent hitting $80 a barrel before the end of the year as the glut of inventories built up during the Covid-19 pandemic is drained by the summer.

The loss of oil output after the big freeze in the U.S. should help the market firm as much of the world emerges from lockdowns, according to Trafigura Group. Inventory data due later Tuesday from the American Petroleum Institute and more from the Energy Department on Wednesday will shed more light on how the Texas freeze disrupted U.S. oil supply last week.

Oil has surged this year after Saudi Arabia pledged to unilaterally cut 1 million barrels a day in February and March, with Goldman Sachs Group Inc. predicting the rally will accelerate as demand outpaces global supply. Russia and Riyadh, however, will next week once again head into an OPEC+ meeting with differing opinions about adding more crude to the market.

“The freeze in the U.S. has proved supportive as production was cut,” said Hans van Cleef, senior energy economist at ABN Amro. “We still expect that Russia will push for a significant rise in production,” which could soon weigh on prices, he said.

PRICES

  • West Texas Intermediate for April fell 27 cents to $61.43 a barrel at 9:20 a.m. New York time
  • Brent for April settlement fell 8 cents to $65.16

Brent’s prompt timespread firmed in a bullish backwardation structure to the widest in more than a year. The gap rose above $1 a barrel on Tuesday before easing to 87 cents. That compares with 25 cents at the start of the month.

JPMorgan Chase & Co. and oil trader Vitol Group shot down talk of a new oil supercycle, though they said a lack of supply response will keep prices for crude prices firm in the short term.

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Crude Oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

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Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

Oil prices rose on Monday as the slow return of U.S. crude output cut by frigid conditions served as a reminder of the tight supply situation, just as demand recovers from the depths of the COVID-19 pandemic.

Brent crude was up $1.38, or 2.2%, at $64.29 per barrel. West Texas Intermediate gained $1.38, or 2.33%, to trade at $60.62 per barrel.

Abnormally cold weather in Texas and the Plains states forced the shutdown of up to 4 million barrels per day (bpd) of crude production along with 21 billion cubic feet of natural gas output, analysts estimated.

Shale oil producers in the region could take at least two weeks to restart the more than 2 million barrels per day (bpd) of crude output affected, sources said, as frozen pipes and power supply interruptions slow their recovery.

“With three-quarters of fracking crews standing down, the likelihood of a fast resumption is low,” ANZ Research said in a note.

For the first time since November, U.S. drilling companies cut the number of oil rigs operating due to the cold and snow enveloping Texas, New Mexico and other energy-producing centres.

OPEC+ oil producers are set to meet on March 4, with sources saying the group is likely to ease curbs on supply after April given a recovery in prices, although any increase in output will likely be modest given lingering uncertainty over the pandemic.

“Saudi Arabia is eager to pursue yet higher prices in order to cover its social break-even expenses at around $80 a barrel while Russia is strongly focused on unwinding current cuts and getting back to normal production,” said SEB chief commodity analyst Bjarne Schieldrop.

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Crude Oil

Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

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Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

Oil prices rose to $65.47 per barrel on Thursday as crude oil production dropped in the US due to frigid Texas weather.

The unusual weather has left millions in the dark and forced oil producers to shut down production. According to reports, at least the winter blast has claimed 24 lives.

Brent crude oil gained $2 to $65.47 on Thursday morning before pulling back to $64.62 per barrel around 11:00 am Nigerian time.

U.S. West Texas Intermediate (WTI) crude rose 2.3 percent to settle at $61.74 per barrel.

“This has just sent us to the next level,” said Bob Yawger, director of energy futures at Mizuho in New York. “Crude oil WTI will probably max out somewhere pretty close to $65.65, refinery utilization rate will probably slide to somewhere around 76%,” Yawger said.

However, the report that Saudi Arabia plans to increase production in the coming months weighed on crude oil as it can be seen in the chart below.

Prince Abdulaziz bin Salman, Saudi Arabian Energy Minister, warned that it was too early to declare victory against the COVID-19 virus and that oil producers must remain “extremely cautious”.

“We are in a much better place than we were a year ago, but I must warn, once again, against complacency. The uncertainty is very high, and we have to be extremely cautious,” he told an energy industry event.

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