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Egypt macro | Fuel subsidy cuts in line with our best case

Fuel price hikes are below our average expectation of 55%. The government hiked fuel prices by an average 45% (17%-66% range), made effective on 16 June 2018. Price increases were skewed to heavily subsidised products, and should reduce the subsidy bill by cEGP50bn in FY18/19 from EGP139bn this year, and lower fuel consumption by 5%. However, the government may still surpass the budgeted fuel subsidy bill of EGP89bn in FY18/19 by cEGP14bn, if the USD:EGP does not appreciate to the budgeted assumption of 17.25. This could reduce the FY18/19 primary surplus to 1.7% from the targeted 2%, on our calculations. Brent prices escalating to the USD90-100/bbl range in FY18/19 (vs. USD74/bbl today) is another downside risk, and could pave way for a smaller fuel price hikes in 2019.

Timing is well played and eases prospects of policy rate hikes. It capitalises well on the relatively low headline and core inflation of 11.4% and 11.0%, respectively, recoded last month, and should maintain inflation below the CBE’s upper target bound of 16% in the coming months, after accounting for 2.5% resulting from last Saturday’s move. In our view, such dynamics justify the CBE maintaining policy rates in the upcoming MPC meeting on 28 June. The unlikely case of a rate hike would also win praise from the IMF, ahead of the upcoming USD2bn load disbursement in July, especially if global pressures continue. In both cases, we view reverting to monetary easing by 4Q18 as likely.

Reiterating our view, social support package underway is insufficient. The government rolling out EGP60bn in social support will not erase consumption pressures, in our view. Support includes raising the minimum tax threshold to 8k p.a., from 7.2k, increasing pensions by 15% and tax discounts to 85% for low income groups. Additionally, salaries paid to civil servants and public sector employees will increase by 7% and 10%, respectively. This may dilute the impact from fuel price hikes on lower income groups, but is unlikely to benefit the larger consumption base, when considering the hike of 30% and 46% in electricity and water prices, respectively, made effective this month, and the combined secondary round effects. Faster-than-expected easing in policy rates is an upside risk to consumption and a catalyst to spending activity.

Contained impact on coverage. In this round of subsidy cuts, the natural gas price was not hiked for industrial companies, due to currently challenging dynamics and an improving natural gas supply. The indirect costs, higher transportation costs, should be mostly borne by the end user for the majority of industrial manufacturers. For consumers, the direct impact of fuel and utility costs for most companies under coverage is marginal, contributing 2-4% of CoGS. The impact on real estate stocks will be minimal, given the limited effect on cement and steel (c15-25% of total construction costs).