The Ministry of Electricity's announcement to increase household electricity tariffs by 20% on average would save around EGP 9.1bn from the household subsidy bill in FY 2019/20, and EGP 16bn from the overall electricity subsidies bill, Beltone said in a research note on Wednesday. The note added that the prices for higher consumption brackets, above 1,000 kW, remain unchanged at EGP 1.45/kW, as they already pay above the production cost of EGP 1.22/kW. Furthermore, tariffs for the commercial sector saw an increase of 14% on average, while the industrial sectors, including energy intensive ones, such as steel, saw an increase of 10%. "The overall increase is therefore 15%, which comes below our estimate of 20%," the report indicates. This is the fourth round of revision to electricity tariffs since the onset of Egypt's IMF-supported reform programme. The government has raised electricity tariffs by 40% in July 2016, 47% in 2017, and 35% in 2018, on average. Beltone notes that the timeline for the phasing-out of electricity subsidies was extended to 2021. The government expects 50% reduction in electricity subsidies allocation to EGP 16.5bn down from EGP 33.5bn in FY 2018/19. Beltone believes that the reduction in subsidy bill will improve the fiscal balance in FY 2019/20, with deficit falling to 7.8% of GDP, down from an expected 8.6% in FY 2018/19. Hike accounted for in our inflation estimates; reiterate our call of maintained interest rates in the Central Bank of Egypt's (CBE) Monetary Policy Committee (MPC) meeting on 23 May. Accordingly, Beltone reiterate their view of an expected 2.5-3.5% increase to annual headline inflation throughout third quarter of 2018 driven by the fourth round of fuel and electricity subsidies cuts, and the third increase in water prices. Thus, the report foresees inflation averaging 13.7% in the second half (H2) of 2019, almost flat from H1 of 2019, average of 13.3%. However, Beltone believes inflation will remain within the CBE target zone, and maintain their view of a maintained interest rates decision in the 23 May meeting. Furthermore, the report forecasts a very limited direct impact on margins for consumer and healthcare stocks. "However, we believe the hike will have a considerable impact on several industrial players, notably Ezz Steel and Arabian Cement. On the other hand, we had already factored in until 2021 the impact of electricity price hikes in the real estate sector," the report concludes.
