April 6, 2017
I. What is the EGPC-ARAMCO deal?
The deal was signed in April 2016 by the two national oil companies and entails monthly supply of 700,000 tons of refined oil products by ARAMCO over five years, with preferential terms. The terms include the amortization of payments over 15 years with an interest rate of 2% and a 3-year grace period. According to the Egyptian Minister of Petroleum, the value of shipments amount to USD 320-340 per month at prevailing prices. Repayments, however, will be based on the market price of oil supplied at time of delivery. Four shipments have already been received.
Shipments by ARAMCO were put on hold back in October 2016. While the official statement by the Egyptian Minister of Petroleum justified the halt on commercial and technical reasons incurred by ARAMCO, we believe it was a political retaliation by Saudi Arabia for Egypt’s opposing stance regarding the conflict in Syria as well as the dispute over the two red sea islands, Tiran and Sanafir. In June 2016, Egyptian courts annulled an earlier agreement between the two governments, which entailed the transfer of sovereignty over the two islands from Egypt to Saudi Arabia. A final ruling, confirming the first one, was issued by the Egyptian courts in last January. On March 15th, however, the Egyptian Minister of Petroleum announced that shipments are to be resumed shortly. The resumption is widely thought to be the result of the mediation by the new U.S. administration, which regards Egypt as a strategic ally in the war against terrorism.
II. How significant is the deal?
It’s very important to put the deal into perspective. The deal secures 33% of Egypt’s needs of diesel oil (AKA Solar), 38% of gasoline needs, and 5% of fuel oil (Mazut) needs. The annual value of shipments represents almost 43% of the import value of petroleum products projected by Dcode EFC in FY 2016/17, and almost 30% of the projected current account deficit in the same year. The total value of the 5-year facility, estimated at USD 19.4 bn, is almost equivalent to the total funding commitments under the IMF program, including those by non-IMF donors.
III. What is the economic impact of the deal resumption?
The deal is expected to have a significant impact on Egypt’s external balances, along with positive spillovers to the fiscal, monetary and real sectors. In the absence of the deal, the government of Egypt would have resorted to global debt markets in order to plug the import finance gap, but at much higher borrowing costs and shorter maturity terms. It could have also depleted significant part of the foreign currency reserves at the Central Bank of Egypt (CBE). Hence, the deal eases the pressure on the foreign currency market, which would in turn support the value of the Egyptian Pound (EGP) against foreign currencies, relative to the baseline scenario (absence of the deal). The relatively higher currency value will help reduce import costs and curb the rise in consumer prices. Therefore, headline inflation under this scenario is expected to be lower, relative to the baseline scenario. Interest rates would exhibit a similar trend, bringing down the cost of borrowing to the government as well as the overall fiscal deficit as percentage of GDP, which would also benefit from higher real economic growth projected under this scenario. The relatively higher growth will be driven by higher private consumption and investment. The former will be supported by lower headline inflation, relative to the baseline scenario, while the latter will be induced by lower import costs as well as better access to credit given the envisaged decline in government borrowing, relative to the baseline scenario.