Cairo - Mubasher: The recent hike in fuel prices in Egypt was not a surprise, as it was just a step, yet an aggressive one, in an already announced subsidy reform program in fiscal year 2014/2015, according to a recent report by MubasherTrade Research.
The reform includes price changes to petroleum products, improving financial efficiency of the Egyptian General Petroleum Corporation (EGPC) and reallocating subsidy spending in favor of food and pension programs, the report explained.
“The program was a response to a ballooning budget deficit in view of a surge in fuel subsidies post 2011 triggered by high demand and higher global oil prices.”
As a start, the government slashed spending on fuel subsidies by around 41% from EGP 126 billion in FY13/14 to EGP 74 billion in FY14/15. However, spending on subsidies of petroleum products were then swollen due to EGP flotation.
The aforementioned subsidies' allocations in FY16/17 budget were projected to be around EGP 35 billion. Yet, the estimated actual for the year is expected to hit EGP 101 billion.
“This reflects both the flotation effect and the rebound in global oil prices from the budgeted $40 per barrel compared to an actual average of around $51 for the year,” the research firm explained, noting that “both factors surpassed the effect of November subsidy cuts.”
The Egyptian government recently announced raising fuel prices to meet fuel subsidies in its budget for fiscal year 2017/2018, which is yet to be approved.
Fuel prices increased by 43%, 55%, and 100% for Octane-92, Diesel and Octane-80, and Butane, respectively.
It was the second fuel price hike in eight months, not very far from the November 2016 when the government decided to raise gasoline and diesel prices by 35% on average coinciding with the EGP flotation decision.
The government has projected a budget deficit of EGP 370 billion, 9% of the country’s GDP, and this figure was somehow based on assumptions that no longer hold, as some expenses, mainly interest payments, will be exceeded.
“With the recent 2% hike in interest rate, we estimate interest payments in the upcoming fiscal year to reach EGP 407 billion versus the budgeted EGP 381 billion,” MubasherTrade Research indicated.
Besides, subsidies to the General Authority for Supply Commodities (GASC) were later increased to EGP 85 billion instead of the initial EGP 63 billion. As the savings from fuel subsidy cuts are expected to be more than offset by interest payments and social package.
MubasherTrade expects the overall deficit to hit EGP 418 billion, higher at 10.2% of GDP in FY17/18.
As the overall deficit is expected to exceed interest payments, the research firm also expects the budget to run a primary deficit, albeit somewhat minimal, of about EGP 11 billion, 0.27% of GDP.
“We believe fuel subsidy cuts will have an overall favorable effect on the budget deficit. However, we believe this will take a longer time compared to the government's timeline as interest payments still take the accrued savings.”
“We expect budget deficit to maintain almost the same level in FY17/18, at 10.2% of GDP, compared to an estimated 10.5% of GDP in FY16/17. However, we believe the budget deficit will decline to a single-digit number over the following years. However, we stress that such improvements will be sensitive to a ballooning interest payments figure.”
“A global tightening monetary policy, especially in the US, can place an upward pressure on Egypt's cost of credit, therefore delaying the positive effect of any subsidy savings,” the report further explained.
The report also explained that fuel subsidy cuts affect inflation through both direct and indirect channels, adding that an increased value-added tax (VAT) from 13% to 14% effective 1 July 2017 will add further to the inflationary pressure.
“We expect inflation rate to ease below 30% in June 2017 before taking off again starting July 2017 where we expect it to range around 34-36%.”
“However, the second quarter of FY17/18 could witness an easing pace of inflation due to the favorable base effect,” the report noted.
MubasherTrade also expects the Central Bank of Egypt (CBE) to keep key policy rates at current levels, and believes the 200 basis points hike in May 2017 was a proactive action in an attempt to repress the anticipated inflationary wave.
