Wednesday,21 November, 2018
Current issue | Issue 1394, (17 - 23 May 2018)
Wednesday,21 November, 2018
Issue 1394, (17 - 23 May 2018)

Ahram Weekly

Budgeting higher oil prices

Safeya Mounir looks at the possible fallout of the US withdrawal from the Iran nuclear deal on Egypt

 

Budgeting higher oil prices
Budgeting higher oil prices

Experts agree that US President Donald Trump’s decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA), the Iran nuclear deal, will lead to an international hike in oil prices since it puts at risk Iranian oil exports to Europe and Asia.

After sanctions on Iran were lifted in 2016, it increased its daily oil production by a million barrels. Of its daily production of 3.8 million barrels, Iran exports 2.5 million. China, India and a number of other Asian countries are the biggest markets for Iranian oil exports.

Part of this amount may now be compromised by the US decision to withdraw from the nuclear deal and to re-impose sanctions on Iran. The price of a barrel of oil reached almost $80 after the Organisation of Petroleum Exporting Countries (OPEC) and Russia agreed in 2016 to reduce the global oil supply by two per cent, or about 1.8 million barrels a day, until the end of 2018.

“Trump’s decision to withdraw from the JCPOA is bad news for Egypt. If oil prices increase, it will not be able to meet its target for the budget deficit,” said Aya Abdallah, an economic analyst with Sigma Capital. The government hopes to reduce the country’s budget deficit to 8.4 per cent of GDP in 2018-2019.

The government’s budget for fiscal year 2018-19 relies on a guide price for the price of a barrel of oil of $67. Any increase on that price would affect the budget deficit and drive the government towards more debt, Abdallah said. It would also negatively affect the positive outlook on Egypt given by international financial institutions and rating agencies.

On 11 May, the ratings agency Standard & Poor’s (S&P) upgraded Egypt’s sovereign credit rating from B- to B. However, it also warned that the rising cost of debt and security threats could pose a danger to Egypt’s recovering economy.

“Negative pressure on the rating could arise if Egypt’s plan to gradually reduce government debt to GDP is derailed by fiscal slippages, higher borrowing costs, or more pronounced currency depreciation than expected, or if foreign-reserve levels were to fall significantly. We could also see negative pressure on the rating if the security environment worsens, hindering the recovery in investment and tourism,” it said.

Experts expect the US sanctions on Iran to trigger a scenario in which the market for crude oil will shrink precipitately in the second half of this year and could well spill over into the next.

An increase as small as one dollar in the price of a barrel of oil translates into a LE4 billion rise in the cost of oil subsidies in the budget, said Riham Al-Dessouki, an economic expert. She added that “a global rise in the price of oil would mean Egypt having to bear more expenses.”

According to its financial statement for the 2018-19 budget, the government is seeking to decrease oil subsidies by 26 per cent, a move anticipated to take place before the start of the new fiscal year. It has allocated LE89 billion for fuel subsidies in the coming fiscal year.

A government source told the media last week that higher oil prices would affect the subsidies bill during the current fiscal year. He expected a LE5 billion increase on the targeted LE110 billion in the budget, and added that the government would likely not be able to achieve its targeted subsidies cut.

“Even if the cuts go into effect, the bill will still be affected,” he commented.

Economic expert Hani Tawfik said the US withdrawal from the JCPOA could trigger a war with Iran, or US military strikes against Tehran.

Should this happen, Egypt’s foreign currency inflows from expatriates, foreign investments, and tourism revenues could all be affected, he said, adding that “a war between the US and Iran could take the price of a barrel of oil up to $140 or $150.”

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