By Husseiny Hassan
Energy investments may be negatively affected in the upcoming period due to declining global oil prices, according to Tamer Abu Bakr, Chairman of the Energy Committee of the Federation of Egyptian Industries. Tamer told Al-Borsa newspaper that the potential impact will affect projects that the government intends to put forward at the economic summit in Sharm El-Sheikh in March 2015.
Oil prices witnessed a 50% decrease compared to the past 5 months, reaching $61 per barrel of Brent crude on Friday.
The impact of the decreasing oil prices on the Egyptian economy varies, with the country’s imports of oil and its derivatives exceeding its exports at $794.4m in the fiscal year (FY) 2013/2014. Egypt was given free oil shipments from the Gulf States in order to support the new government at that time.
The decline in oil prices will directly lead to lower allocations of energy subsidies, which was the biggest challenge post-revolution regimes faced since the 25 January Revolution. Currently, allocations of the energy subsidies for FY 2014/2015 amount to EGP 104bn, following the government’s July decision to increase fuel sale prices to lower the budget deficit.
Salah Hafez, former Vice President of the National Petroleum Company, expects the decline in oil prices globally will provide Egypt with EGP 30bn of subsidised oil derivatives. This would mean subsidies amount to EGP 70bn instead of EGP 100bn, reducing the budget deficit bill during the upcoming period.
The government expects oil prices for FY 2014/2015 to be at $100 per barrel, which means prices of import and export subsidies will go down.
Mona El-Baradei, Economics Professor at Cairo University and Executive Director of the Egyptian Banking Institute of the Central Bank of Egypt (CBE), expects government energy subsidies to be at EGP 25bn for FY 2014/2015, following this decline.
The decline in global oil prices is a huge risk which may impact many government plans, the most important of which are efforts to maintain a safe margin of foreign currencies. Although oil is the largest imported commodity in Egypt, it is considered the main source for foreign cash in more than one sector.
The oil sector is the biggest investment attractor to foreign investors in Egypt historically, and it is the biggest commodity Egypt exports.
Oil revenues will decrease gradually with the price decline in the global market, and this will decrease foreign investment revenues in the Egyptian market, said El-Baradei.
Foreign investments in the oil sector form 39% of the total direct foreign investments during last year.
The government is working to pay a $6m overdue repayment to global oil companies to encourage them to continue injecting new investments in the sector. It will also add new extractive capacities, especially for natural gas. This will reduce imports after Egypt’s production decline in the past few years.
The decline in global prices may not encourage foreign companies to inject more investments in the Egyptian extractive sector at the moment, according to chairman of the Energy Committee in the Federation of Egyptian Industries.
The government aims to attract foreign investment worth $10m during FY 2014/2015, but the oil price decline and the slow global growth may come in the way, according to Investment Minister Ashraf Salman.
The country’s exports of oil and derivatives fell from $13bn in FY 2012/2013 to $12.4bn in FY 2013/2014. This represented 47.5% of the total Egyptian exports.
Hafez said that it is only natural that oil revenues decrease, adding that “we are an importing country of energy, what concerns us is the prices of imports”.
Without a good performance of foreign exports and investments, the country’s ability to provide foreign exchange from its own resources will remain poor. Foreign exchange reserves now reach $15.9bn, which is enough for three months of imports, but not enough to protect the local currency, exposed to many crises on the unofficial exchange market. As a result, the dollar trading is for a higher price than its real price by 5%.
Ibrahim Zahran, an oil and energy expert, said that the import bill will be reduced, adding that the current oil prices situation is negatively affecting Gulf investments in Egypt at the moment.
The government is adopting a declared plan to get rid of energy subsidies within five years starting from July last year. It aims to implement a plan for fuel distribution through Smart Cards in April in order to control oil smuggling to neighbouring countries and find out exact needs of fuel.