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Monday, 8 October 2018

With the price of oil stubbornly high, the Madbouly government may be looking at a fuel hedge after all

** #1 EXCLUSIVE- With the price of oil stubbornly high, the Madbouly government may be looking at a fuel hedge after all. The cabinet of Prime Minister Mostafa Madbouly is drafting a policy change that would allow the Finance Ministry to move ahead with a hedging strategy to shield the state budget against the rising price of oil and other key commodities, a government source told Enterprise yesterday. The policy would outline options and set the framework through which the finance minister can adopt hedging strategies without further straining the state budget. The policy package would also allow the minister to create a government-affiliated unit that would track commodity prices as part of the hedging strategy.

Global oil prices rose at a much faster pace than the government initially expected, the source also told us. Finance Minister Mohamed Maait had said last month that plans to sign fuel hedging contracts with global banks, widely believed to be JP Morgan and Citibank, had been temporarily shelved and would be killed entirely if global oil prices were to stabilize. Last week, however, sources told us that government is now expecting its fuel subsidy bill for FY2018-19 to jump to EGP 100 bn, up from an initial projection of EGP 89 bn, after Brent crude prices surged beyond the USD 80/bbl mark to reach a four-year high.

Deficit reduction target under pressure: According to Bloomberg, every USD 1 increase above the budgeted oil price of USD 67/bbl adds EGP 4 bn (USD 222 mn) to the state’s annual outlay, possibly preventing the government from hitting its budget deficit target of 8.4% for the fiscal year. A government source had told us earlier this month that the gap is likely to come in at something closer to 8.6%. All of this comes as some analysts are tipping crude to break the USD 100/bbl mark amid a US-driven ban on Iranian oil.

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