Mixed expectations for a possible recovery

A full year of economic recession came to an end, but still not fully solved yet. However, the beginning of 2010 has been filled with hopes for global economic recovery, combined with mixed expectations concerning a possible national revival of the petroleum sector during this year

For an outsider, it looks like the oil market endured an awful year: low and volatile prices, surging inventories combined with the impact of the credit crunch. As a result, the Organization of Petroleum Exporting Countries (OPEC) left its year-old output targets unchanged in their last meeting in the Angolan capital on the 22nd of December, as the group grappled with overproduction by some in its ranks that could undercut efforts to support oil prices amid a fragile global economic recovery. Hence, for OPEC, the best plan of action was not to act.

The lack of action meant to avoid shocking an oil market in which crude prices have stayed within range of OPEC’s unofficial target of $75 a barrel for months. The relative price consistency has provided OPEC a measure of relief after oil demand and prices collapsed last year amid the world’s worst recession in more than six decades.
Prior to their meeting, several OPEC ministers voiced satisfaction with existing prices. Ali al-Naimi, Saudi Arabia Oil Minister, described the prices as “perfect, perfect,” while Ecuador’s Oil Minister, Germanico Alfredo Pinto Troya, said current prices are “good for everybody, especially producers.”

Consequently, oil futures edged down to nearly $73 per barrel shortly after OPEC’s decision. On one hand, New York’s main futures contract, light sweet crude for delivery in February, gained five cents to $73.77 a barrel; while on the other hand, Brent North Sea crude for February gained 14 cents to $73.13.
Locally, officials and observers have mixed expectations regarding the recovery of the oil sector in the New Year based on the modest economic recovery which supposed to emerge in 2010.

“The company’s budgets and ambitious scheduled programs for the new fiscal year mid 2010 reflects the expected upturn regarding exploration activities in the region of Ganoub EL Wadi ,” Hany Nassar, Ganope Vice Chairman for Exploration & Agreements, told Egypt Oil & Gas.

“These programs were postponed from 2009 to be achieved in 2010 due to the world economical crisis,” Nassar added.
“According to the nature of the Ganoub EL Wadi region and the shortage of its required data as well as the current credit crunch, the anticipated programs are considered good enough. However, we are hopefully waiting more investments as long as there are good impacts and indicators from the operating companies in the region which will motivate them for more investments.”

On the other hand, Egypt was rather slow to feel the impact of the global economic downturn. As other countries start to report their emergence from recession, its recovery is likely to lag behind the rest of the world, too.
“The impact of the international economic recession on Egypt was slow compared to other countries but I think it won’t be the same concerning the recovery,” Nassar concluded.
For him, in Egypt, the aspects of the agreements obligate the operating companies to speed up their operations due to the existence of guarantees and financial and technical commitments.

Nevertheless, Dr. Ibrahim Zahran, a petroleum expert, believes that we will not be able to undergo the impact of coming out from the recession this year.
“There are no existent positive indicators to sense the proposed recovery,” said Zahran. “Not being among the first nations to encounter the dilemma of this crisis is not due to our strong economic system but rather because we lie on the bottom of the ocean,” added Zahran sarcastically.

“The Egyptian government, consisted mainly of businessmen, did not deal with the crisis in a proper way after supporting the national operating companies with L.E15 billion as financial incentives since it was considered as an appeasement for them so as not to halt their investments. In the U.S, the government treated the problem more wisely by pumping $700 billion on bailout after establishing a rescue program,” the expert explained.

Moreover, “I think the oil prices will not witness another hike in the oil prices this year since the current status is being changed”. The plans of more than a country like Iraq, Angola, Sudan as well as Iran to increase their production will help to keep the current average price for a short period. Besides, the role of the OPEC became subject to political concerns, which is counteractive to the charter of its establishment, he added.

Conversely, Dr. Othman Moahmed Othman, Egyptian Minister of Economic Development, reaffirmed earlier that the economy saw a GDP growth of 4.7 per cent in fiscal year (FY) 2008/09. Despite the drop from 7.2 per cent in FY07/08, CI Capital Research believes that “Egypt is still revealing strong growth potentials, with an average growth of 4.4 per cent in 2009 well above the IMF’s 2.7 per cent expected growth for the region.” They estimate that Egypt will manage 4.5 per cent in FY09/10 and will strongly pick up in FY10/11 with a growth of six per cent.

On another positive note, Moody’s Investors Service has changed its outlook on Egypt’s sovereign ratings and ceilings back to stable from negative. This affects Egypt’s local and foreign currency government bond ratings, its country ceiling for foreign currency bank deposits and its country ceiling for foreign currency bonds. The credit rating agency maintained its stable outlook on Egypt’s banking sector as well. In June 2008, Moody’s changed the outlook on Egypt’s ratings and country ceilings to negative from stable and lowered the government’s local currency bond rating mainly because of concerns over the adverse social and economic consequences of soaring inflation.

Moody’s said that Egypt’s economy has been less affected to date by the global economic crisis than many rating peers. It attributed this to Egypt’s “moderate level of economic openness, solid external position, well-diversified economy, and stable, if rather underdeveloped, banking system that has been restructured in recent years and has limited foreign exposure.”
In general, Moody’s announcement was a breath of fresh air, particularly coming on the back of figures released by the Central Bank of Egypt (CBE) showing a deficit of $3.4 billion in Egypt’s balance of payments (BoP) for FY2008/ 09. The CBE said the deficit was an outcome of a current account deficit of $4.4 billion.
In addition, according to CBE figures, merchandise export proceeds declined by $4.2 billion to stand at $25.2 billion. The decline reflected the fall in oil exports by 24 per cent and in non-oil exports by 4.8 per cent. Merchandise import payments declined by 4.6 per cent to $50.3 billion, reflecting a 26.4 per cent drop in oil imports.

Elsewhere, the international investors’ well-known tendency to discount the future, which was so helpful to the market in 2009, could be a pain to it in 2010. Central banks have introduced an extraordinary flurry of measures to deal with the credit crunch, including guarantees of bank debt and the outright purchase of assets. At some point, they will have to unwind those strategies. Even if that unwinding is delayed until 2011, investors may spend the second half of 2010 speculating about it.

All these issues can be summed up in one big dilemma. If the economy does not enjoy a typically vigorous rebound, then the market must come under threat.

By Ahmed Morsy


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