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Many MENA Oil Importers Remain Vulnerable to Higher Prices

Higher oil prices are set to lead to higher twin deficits and inflation in most Fitch-rated energy importers in the Middle East and North Africa (MENA), the agency says in a new report. Most MENA ex-GCC sovereigns are net importers of hydrocarbons. We assume oil prices will moderate to average USD70 a barrel in 2022 (similar to 2021) and fall further in 2023-2024. However, price risks are to the upside.

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 through to transportation CPI inflation.

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.
Source: Fitch Ratings

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