Industry Trend Analysis - Quick View: Risk To Fuel Subsidy Reform Timeline - FEB 2018

The Latest: Egypt has allocated USD8.0 billion (EGP145 billion) for refined fuel subsidies in the 2017/2018 fiscal year which is set to begin in July. This follows government expenditure of (USD5.69bn adjusted for devaluation) EGP78 billion pounds on fuel subsidies in the first nine months of the 2016-17 fiscal year, up from (USD4.65bn) EGP41 billion in the same period of the previous year. Heavily subsidised fuel prices have been a continuous burden on government expenditure, as the country looks to reduce its ballooning deficit and service the requirements of its USD12 billion International Monetary Fund loan agreement.

Implications : The allocation of a larger chunk of capital to service refined fuel subsidy payments suggests a higher risk to delays in the timescale for further subsidy cuts. The Egyptian government has taken some steps to curb the huge budgetary pressures caused by fuel subsidies, with two previous subsidy cuts since fiscal reforms were enacted in 2014. However, the persistence of extraordinarily high inflation over 2017 (see ' Further Tightening Ahead As Inflation Remains High ' , April 21) is likely to dissuade policy makers from enacting further subsidy cuts, which have been extremely unpopular domestically with widespread social unrest seen across the country.

Whats Next ? Delays or slippage in the timeframe for further subsidy reforms will be a contentious issue between the IMF and the Egyptian government, with the latter looking to balance further structural fiscal reforms whilst keeping inflation in check. From a demand perspective, we maintain that subsidy reforms pose notable downside risk to domestic fuels consumption, with price hikes dissuading spending as consumers prioritise essential goods such as food and drink and adjust their consumption habits more aggressively away from fuel (see ' Subsidy Cuts Pose Downside Risk To Consumption ' , November 8 2016).

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