Another corner of the energy market threatens to deal a new blow to Egypt’s fragile government finances although its milestone of regaining self-sufficiency in natural gas.
The North African nation already faces an uphill struggle to reach its goal of cutting the budget deficit to 8.4 percent of gross domestic product in the current fiscal year, which ends in the middle of 2019. Foreign investors are shunning local-currency treasuries and the government’s cost of borrowing has risen since the fiscal year started in July.
Every dollar above its budgeted oil price translates into 4 billion pounds ($222 million) in additional expenditure annually. The government plans to spend 89 billion pounds on fuel subsidies in the current year, a figure that may double if oil continues to rally. Under official estimates, the fiscal deficit will reach 439 billion pounds this year.
A surge in fuel subsidies will make Egypt’s 439 billion-pound deficit target harder to achieve.
The nation’s trade balance will also suffer, potentially wiping out gains from ending LNG imports. Every extra $10 in oil prices add $1 billion to $1.2 billion to Egypt’s current-account deficit, according to estimates by Mohamed Abu Basha, head of macro analysis at Cairo-based EFG-Hermes investment bank.
Wary of such risks, Egypt had made an agreement with Citigroup Inc. and JP Morgan Chase & Co. to hedge against fluctuations in oil prices. The plan, however, hasn’t been implemented as a result of the surge in prices, Finance Minister Mohamed Maait said September 19.
Although a revenue increase from Egypt’s own oil exports should partially mitigate some of the
on the budget and the balance of payments from higher crude prices, the net effect will likely be negative, Abu Basha said.
Brent crude traded around a four-year high of $84.9 a barrel as markets tighten ahead of U.S. sanctions on Iran and plummeting Venezuelan production.
OPEC’s largest producer, Saudi Arabia, said it had boosted production to near-record levels.
If oil stabilized above $80, the coming fuel price hike planned for the middle of next year will be “more costly from an inflation perspective,” according to EFG-Hermes. That, in turn, will mean interest rates — which were slated to drop in the current fiscal year — will likely remain elevated for a longer period of time, it said.
After ending LNG imports in September, Egypt aims to become a regional gas hub
While the outlook for oil holds out little promise for Egypt, the country is fast emerging as a regional hub for gas re-exports to its neighbors. Two recent deals paved the way for Egypt to pipe in Israel and Cypriot gas, likely for liquefaction and shipment to Europe.
Becoming self-sufficient not only allows Egypt to reduce imports by about $2 billion a year, “but will also increase direct investment in energy-related industries,” said Hany Farahat, senior economist at CI Capital in Cairo