Fuel Price Increases To Curb Consumption

BMI View: The impact of fuel price increases will temper demand for gasoline and diesel over the coming quarters. Inflationary pressures and minor opposition to the rise in fuel price will see the government delay further energy reform for around 12 months, though we see further subsidy reduction as necessary to manage the growing fiscal imbalance.

Egypt's new government has acted more rapidly than anticipated with regards to its subsidy reform programme. As of midnight July 5, the price of gasoline, diesel and natural gas were increased. Low grade gasoline was raised by 78% to around USD0.22/litre, high octane gasoline went up by 40% to USD0.38/litre, while diesel increased 64% to USD0.26/litre. We forecast the changes to slow the strong fuel consumption growth of previous years.

Fuel Consumption Growth To Slow

Fuels Consumption To Wane
Gasoline And Distillate Fuel Consumption (000b/d)

BMI View: The impact of fuel price increases will temper demand for gasoline and diesel over the coming quarters. Inflationary pressures and minor opposition to the rise in fuel price will see the government delay further energy reform for around 12 months, though we see further subsidy reduction as necessary to manage the growing fiscal imbalance.

Egypt's new government has acted more rapidly than anticipated with regards to its subsidy reform programme. As of midnight July 5, the price of gasoline, diesel and natural gas were increased. Low grade gasoline was raised by 78% to around USD0.22/litre, high octane gasoline went up by 40% to USD0.38/litre, while diesel increased 64% to USD0.26/litre. We forecast the changes to slow the strong fuel consumption growth of previous years.

Fuel Consumption Growth To Slow

As a direct result of the subsidy changes we forecast fuel consumption growth in Egypt to wind down. Much of the recent strong growth was driven by the favourable populist policies implemented by the Muslim Brotherhood. Prices are now being reverted to pre-Morsi levels and will improve fiscal stability in Egypt over the next twelve months. During the next year it is unlikely the government will enact further changes to fuel prices in order to mitigate the impact of inflation. That said, we do not rule out reform to energy subsidies continuing over the coming years.

We had already forecast a slowdown in fuels consumption growth from 2015, though have now brought this forward to 2014. With the price at the pumps having already increased, we expect a similar immediate impact on demand as consumers become less profligate with fuel use. In addition to efforts to improve the efficiency of fuel consumption as well as stamp out fuel smuggling through a smart card system, we expect consumption growth to weaken over the coming years.

Fuels Consumption To Wane
Gasoline And Distillate Fuel Consumption (000b/d)

Crucial Subsidy Changes Unfolding

The price increases are intended to reduce the fuel subsidy budget by around USD6bn and will be a key development in reducing the fiscal burden of energy subsidisation. In 2013 Egypt's total government debt was almost 84% of GDP. The reduction of fuel subsidies should help ease pressure on the budget over the coming years, though 16% of the state budget for the coming 12 months is still being set aside for energy subsidies. Overall, the subsidy reform improves Egypt's fiscal position and we forecast the budget deficit to decline from 14% of GDP in FY2013 (fiscal year running from July 2012 - June 2013) to 8.3% in FY2016.

Approaching A Turning Point
Total Debt And Fiscal Deficit As % Of GDP

Initially we were expecting the el-Sisi government to move more slowly with energy subsidy reform due to the delicate social situation in Egypt. The price rises have already caused some backlash among taxi drivers, which led protests in major cities as fuel costs nearly doubled overnight. Heavy industry, in particular cement and steel, have also been vocal suggesting the government now needs to do more to protect their industries. However, there has also been a level of acceptance among lesser affected citizens and we do not see a significant social reaction as a result of the changes.

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Related sectors of this article: Oil & Gas, Refining/Marketing, Energy Policy
Geography: Egypt
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