How will deregulation of Fuel Prices affect Retail and FMCG sector in UAE
A recent UAE government ruling to deregulate the price of fuel will have a positive effect on the economy, it is believed. Diesel prices will go down whereas petrol prices will trend upwards. The cost of goods are likely to reduce due to decrease in diesel prices, whereas the increase in petrol prices will see more people leaving their cars behind and using the public transportation systems including metro, trams and route buses.
According to Matar Al Neyadi, Undersecretary of Ministry of Energy, this change in fuel prices will increase the competitiveness of the UAE economy and enhance the free market. As per reports published on Gulfnews, Suhail Al Mazroui, Minister of Energy, said that in accordance with the new pricing policy that has been ratified by the UAE Cabinet, a fuel price committee has been set up to review fuel prices against average international levels prior to their implementation in the UAE every month. He said “Considering the international prices of oil and petroleum derivatives, we expect diesel prices to go down. This will stimulate the economy as lower diesel price would mean lower operating costs for a wide number of vital sectors like industry, shipping and cargo among many others.”
Some UAE analysts feel De-regulation of fuel prices is likely to have a limited impact in terms of operating costs or erode margins for select companies in the region. According to Jaap Meijer, managing director at Arqaam Capital – Transportation cost will increase with higher fuel prices, but companies would re-price that to the clients, so initially that could erode margins for transportation companies. However Ministry of energy says that this new pricing strategy could positively impact in decreasing the operating costs of many firms, which uses diesel.
Terming the move as a sensible move towards fiscal prudence, Meijer says “We expect the impact on inflation to be around 3 per cent, so it’s very manageable in terms of overall inflation. This could lead to an indirect impact on companies though. Cost of gasoline represents 3-4 per cent of an average household income in the UAE, which is a reasonable percentage compared to international costs. I’m looking at an indirect impact on consumers having less money to spend. This would have indirect impact on the top line of corporate sectors. Due to higher fuel costs, consumers will have less money to spend,”
According to Sanyalaksna Manibhandu, Manager of Research, National Bank of Abu Dhabi Securities – “Consumers will have to compensate an increase in expenditure elsewhere. The move could impact discretionary spending of individuals, impacting luxury item sellers. People will avoid unnecessarily spending money on at the first instance. People may go out less for instance as cost of travelling to work has gone up,”