Energy importers in MENA could see higher inflation, wider deficits - Fitch

Higher oil prices could expose energy importers in the Middle East and North Africa (MENA) to higher fiscal and external outlays and higher inflation, which could undermine social and political stability, according to Fitch Ratings.

Most MENA sovereigns that are rated by the agency--excluding the GCC--are net importers of hydrocarbons, particularly Jordan, Lebanon, Morocco and Tunisia, who use hydrocarbons mostly to produce electricity and in transportation. 

"We assume oil prices will moderate to average $70 a barrel in 2022… and fall further in 2023-2024. However, price risks are to the upside," the agency said.

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. Support to electricity sectors is a significant contributor to fiscal deficits and/or the build-up of indebtedness in Jordan, Lebanon and Tunisia. Electricity prices for consumers were flat in 2020-2021 in Morocco and Tunisia but rose in Egypt, Jordan and Lebanon.

Petroleum subsidies have largely been removed and prices adjust to oil market fluctuations, although subject to decisions by a pricing committee in most countries and a small monthly adjustment cap in Tunisia. Higher oil prices have trickled down through to inflation in the transportation sector.

"Higher energy prices will widen current account deficits of net energy importers, particularly Jordan, Lebanon, Morocco and Tunisia. In Lebanon, import volumes will be constrained by dwindling foreign-exchange reserves, absence of external funding and a collapsing economy. In Tunisia, higher energy prices will put pressure on foreign-exchange reserves, amid lack of access to external funding."

Rising prices of hydrocarbon feedstock could require changes in tariffs or higher fiscal outlays to support electricity 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), as does domestic hydrocarbon production (Egypt, Israel and Tunisia) and electricity generation from renewables (Morocco).

"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," Fitch said.




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