A Tough Year Ahead for Africa’s Oil Exporters

Although the world oil price has partially recovered since hitting a six year low in January 2015, last year’s fall in price will continue to have an effect on Africa’s oil exporters throughout this year. The impact of the fall is likely to be compounded by respective governments’ previous overestimation of the price of oil in their budget predictions. The effect of this can already be seen in Ghana, where the government borrowed heavily based on expected oil earnings, and was subsequently forced to seek a bailout from the International Monetary Fund (IMF).

In April 2015, the Brent Crude oil price rallied and increased by 20 percent. In early May 2015, it reached a high for this year, trading at over $67 a barrel, and at the time of writing it is trading at $66.66 per barrel. Although this is a significant improvement, it is far from the average price of May 2014 ($109.41 per barrel). Furthermore, analysts are wary about labelling this increase in price a recovery. A top commodities official at Commerzbank told CNBC that the price rise is “premature” and that it could soon fall back below $50 a barrel. The increase in price has primarily been attributed to conflict in Libya and Yemen, which has disrupted supply and created fear of further disruptions. However, since Libya’s descent into civil war its oil production and exports have been volatile, so it is possible that they could pick up again very soon. Furthermore, the Iran Nuclear Deal could also spell the end of international sanctions opening the market to another supplier. Thus, the recent increase in price should be viewed cautiously. This is reflected in Société Générale’s recent 2015 average Brent price forecast of $59.54 per barrel. Moreover, in more broader terms, the Organisation of Petroleum Exporting Countries (OPEC) have predicted that oil prices will stay below $100 per barrel for the next decade.

If the recent recovery of oil prices is “premature” and another slump appears, this will put a strain on Africa’s oil exporters’ relationship with OPEC. In November 2014, OPEC decided to maintain production levels agreed upon in December 2011, meaning that prices continued to fall. This policy particularly hit countries with relatively high production costs such as Nigeria, where it costs $20-$40 per barrel compared to $4-$10 per barrel in Saudi Arabia. Although Nigeria did not publicly criticise this strategy like Algeria and Iran, a continuation of it after OPEC’s next conference in June 2015 could create greater opposition amongst Africa’s oil exporters.

Nonetheless, even after the recent recovery, Africa’s major oil exporters are still struggling. It has been calculated by the IMF and Deutsche Bank that Algeria, Libya and Nigeria all require oil prices of over $120 per barrel to balance their budgets, while Angola requires a price of $98 per barrel. This has unsurprisingly put pressure on these countries’ finances. In Nigeria, it was projected that even if the oil price averages at $70 a barrel for 2015, the expenditure levels outlined in the Medium Term Expenditure Framework from November 2014 would leave the country with a fiscal deficit of 1.3 trillion Naira. As a result, governments have reassessed their expected oil earnings and their budgets. As the IMF noted in April 2015 for Africa’s oil exporters the fall in price “will pose a formidable challenge” and it will “require them to undertake significant fiscal adjustment”.

In Nigeria the government has changed its benchmark price for crude oil to $53 per barrel and in Angola it is now $40 per barrel. The IMF has projected that in both of these countries GDP growth will be hit, with Nigeria’s growth falling by 2.5 percent from expectations in October 2014. This decrease in government revenue is reflected in the countries’ budgets. In Angola, the government cut spending by 1.8 trillion Kwacha in its revised budget in February 2015, and still predicted a budget deficit of 7 percent of GDP. Although Nigeria is not looking to cut its budget – which is waiting to be finalised – and are predicting a lower deficit of 1.12 percent of GDP, the House of Representatives have controversially proposed to remove the fuel subsidy and reduce capital expenditure to 21 percent of the budget. This increases the likelihood of popular unrest like that seen in January 2012 after the government first attempted to remove the subsidy. Due to the unreliable electricity supply provided by Nigeria’s national grid, a large proportion of citizens and businesses rely on subsidised fuel to power electricity generators. Thus, this will have a disproportionate impact on less well-off Nigerians and small businesses. The effect of the proposal to remove the subsidy is already being felt in Nigeria through fuel shortages which are set to worsen as marketers restrict imports over fears of the subsidy removal. Furthermore, with a restricted capital expenditure budget it is unlikely that the new All Progressives Congress (APC) government – under the leadership of President-elect Muhammadu Buhari – will be able to make the infrastructural investment needed to significantly improve the national electricity supply. Thus, in Nigeria and across Africa’s oil exporters societal tension and popular unrest are likely to increase as a result of governments’ attempts to restrict spending.

For Africa’s oil exporters, 2015 is likely to be an extremely tough year if prices stay at their current level or drop once more. Although Nigeria’s finance minister – Ngozi Okonjo-Iweala – pronounced last year that “we no longer want to be known as this oil economy”, Africa’s oil exporters have not been able to significantly reduce their reliance on oil. In Angola, Nigeria, Equatorial Guinea and the Republic of the Congo oil represents over 70 percent of government revenue, and in Gabon and Algeria it represents over 50 percent. In pre-civil war Libya it even reached over 90 percent of the government’s revenue. It also accounts for a large proportion of foreign exchange earnings, with Angola owing 90 percent of its earnings to oil. This dependence has been reflected in depreciating exchange rates, as illustrated by the Naira, which reached a record low against the dollar in February 2015. As a result, governments have not only looked to cut public spending but also increase borrowing. For example, in Nigeria the government have already used over half of its projected borrowing allowance of 882 billion Naira to meet recurrent expenses, such as government employee salaries.

The outlook for 2015 in Africa’s oil exporters remains bleak. Governments are likely to increase debt considerably while depleting their foreign exchange reserves and sovereign wealth funds. Cuts in public spending are likely to cause significant social unrest and it is highly unlikely that companies will pursue new projects due to their loss of revenue. This was indicated by Shell’s and Total’s decisions to delay offshore projects in West Africa in April 2015. Africa’s oil exporters’ dependence on oil has made the impact of the fall in prices particularly acute. Only through significant restructuring of their economies will they be able to avoid such shocks in the future and adapt to OPEC’s predicted long-term slump in prices.

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