Mena oil importers remain vulnerable to higher hydrocarbon prices amid rising inflation

Many are looking at wider fiscal and current account deficits as energy prices rise, Fitch Ratings says

Drivers queue in front of a petrol station in the Lebanese capital Beirut. Fuel and utility prices remain a sensitive issue for political and social stability in the country facing its worst post-war Show more

Oil-importing economies in the Mena region remain vulnerable to rising crude prices that are expected to widen their fiscal and current account deficits, in addition to stoking inflation, according to Fitch Ratings.

Most Mena counties – except the hydrocarbon-rich GCC bloc – are net importers of oil and gas, the main source of energy in electricity generation and the transport sector.

Rising hydrocarbon prices expose these economies to a “combination of higher fiscal and external outlays” and stokes inflation, which could “undermine social and political stability”, Fitch analysts Cedric Berry and Krisjanis Krustins said a report.

In all Mena oil importers except Israel, regulated electricity prices are below the cost-recovery level, although countries are seeking to raise tariffs over the medium term.

Financial support for the power sector is a significant contributor to fiscal deficits and has increased the indebtedness of Jordan, Lebanon and Tunisia, in particular.

Electricity rates for consumers in Morocco and Tunisia were flat between 2020 and 2021 but rose in Egypt, Jordan and Lebanon.

Countries – especially Jordan, Lebanon, Morocco and Tunisia – are looking at bigger current account deficits as energy prices continue to increase.

Oil prices rose more than 67 per cent last year and are at their highest since 2014. International benchmark Brent was trading at $88.95 a barrel at 1.54pm UAE time on Wednesday while West Texas Intermediate, the gauge that tracks US crude, was trading at $86.08.

Import volumes in Lebanon, which is facing one of the world’s worst financial contractions since the 1850s, will be constrained by dwindling foreign currency reserves and the absence of external funding as its economy continues to reel.

Lebanon effectively eliminated fuel subsidies in October 2021 after successive rounds of price rises brought the exchange rate, which is used to price fuel imports, in line with black market rates.

“Fuel inflation, including fuel for transport and electricity generation, was 1,389 per cent in November, reflecting subsidy cuts and monetary debasement as overall inflation climbed to 201 per cent," the Fitch analysts said.

In Tunisia, higher energy prices will put pressure on foreign currency reserves, amid a lack of access to external funding.

The higher input cost will put more strain on the finances of the state-owned Tunisian Company of Electricity and Gas, better known as Steg, which has recorded successive losses in recent years.

Fitch projects that the cost of selling electricity below production cost could surge to more than 1.8 per cent of gross domestic product in 2022, from 0.8 per cent of GDP in 2021, unless sales prices are adjusted.

Tunisia's Steg is already highly indebted, with debt of more than 10 per cent of GDP at the end of 2019. The rating agency expects most of the additional subsidy costs to eventually translate into additional transfers from the budget.

Fitch also estimates that if oil prices remain at about $80 a barrel without reforms, the fiscal deficit could widen by 1 percentage point in 2022 and 2 percentage points in 2023.

“Authorities estimate that a $10-per-barrel higher oil price increases the cost of oil and gas subsidies by 1 per cent of GDP,” Fitch said.

Higher energy prices have further stoked already rising inflation. Central banks around the world are now consider tightening their accommodative monetary policies to control higher consumer prices.

Jordan, which imports more than 94 per cent of its energy needs and has removed petroleum subsidies in 2012, is expected to have registered a net energy trade deficit of more than 6 per cent of GDP in 2021, up from about 4 per cent in 2020, according to Fitch. The kingdom's National Energy Strategy 2015-2025 aims to raise the proportion of energy consumption met from local supplies to almost 40 per cent from 2 per cent and also target 11 per cent renewable energy input into the energy mix by 2025.

“This is a driver of Jordan’s forecast overall current account deficit of over 9 per cent of GDP, although favourable funding conditions and external support mitigate debt sustainability risk, and external liquidity metrics are adequate,” the Fitch analysts said.

Rising prices of hydrocarbon feedstock could require changes in tariffs or higher fiscal outlays to support power sectors, although utilities can absorb higher losses in the short term.

Long-term gas supply agreements cushion the impact of hydrocarbon price swings in Jordan and Tunisia. Egypt, Israel and Tunisia benefit from domestic hydrocarbon production, while Morocco gets its cushion from electricity generation from renewables.

However, fuel and utility prices remain a “sensitive issue for political and social stability, and we believe further reductions in subsidies under consideration could once again spark social and political instability, particularly in Tunisia”.