EUR 21.44 For Business Accounts Only

Egypt macro & strategy | Electricity price increase lower-than-expected; Not a game changer for inflation, industrial activity

Government raises FY19/20 electricity prices by 20% for residential use, 9% for industrial use, and 14% for commercial use. The Cabinet approved the new electricity tariff increases for FY19/20, which entailed an average increase of 20% in residential prices, 9% in industrial prices, and c14% in commercial prices (full details are included in the table overleaf). This comes in line with the direction we envisioned, but at a lower magnitude than our expectation of a 30% increase, on average, across the board, and 12.5% below the hike of FY18/19. We partially attribute this to lower cost inflation for electricity production, given the y-t-d 4.5% USD:EGP appreciation. We estimate the new prices to represent an average cost to price ratio of 72%,  meaning further rounds of electricity subsidy cuts are still needed over 2020-21e for the full liberalisation of electricity prices, as per the government’s fiscal consolidation plans.

Contained impact on inflation. We highlight the announced electricity price hikes for FY19/20 are 12.5% below that of last year. As per our in-house macro view, an average fuel price hike of 40% is expected to materialise in June, as the IMF programme ends. We look for the combined energy price adjustments to add 2.5% to headline inflation during 3Q19, all else constant. Accordingly, we maintain our inflation forecast at an average of 13% during FY19/20, and expect the CBE will maintain its policy stance during 3Q, and resume monetary easing only in 4Q19 after inflation pressures ease.

Lower-than-expected electricity price increases a short-term breather for Egypt industrials; Long-term view intact. The lower-than-expected increases for industrial users represents a breather, in our view, for Egypt’s’ industrial activity, which has been pressured by global headwinds and above average domestic energy prices. In the medium to long-term, we expect electricity prices should eventually increase, reaching the liberalised price of EGP1.5-1.6/KWh, on which we base our industrials valuation. The market’s recent expectations of electricity price cuts for industrial users was unfounded, in our view.

Egypt Aluminium the highest beneficiary from lower-than-expected increase among our coverage. Egypt Aluminium [Neutral | TP EGP24.9] is a short-term beneficiary from lower-than-expected electricity price increase, with the prospects of generating EGP2.4bn in EBITDA in FY19/20e. This is 43% above our base-case EBITDA estimate, with no material impact on long-term valuation, which we base on a EGP1.51/KWh electricity price. Otherwise, across our Egypt coverage universe, the lower-than-expected increase in electricity prices should have a marginal impact on short-term operating outlook and valuation.