According to Business Monitor International (BMI), oil prices at US$ 60/bbl would have a harmful impact on Sub-Saharan Africa’s economic growth outlooks. The effects of low prices would vary in severity between countries depending on their status as a net importer of exporter of oil products.
Sub-Saharan Africa’s (SSA) net oil exporters, of which there were 12 in 2013 according to the African Development Bank (AfDB) data, will be negatively affected by oil prices at US$ 60/bbl via several channels. Fiscal accounts will come under pressure as governments in oil producing nations rely on oil revenues for budget revenues to a greater or lesser extent.
Equatorial Guinea, the Republic of Congo (Congo-Brazzaville), Angola, Nigeria, Gabon and Chad all earn more than 50% of total fiscal revenues from oil production. The risks in these countries are highlighted by baseline 2014 budget oil price assumptions of US$ 104/bbl, US$ 98/bbl and US$ 97/bbl; all are higher than the Brent spot price of US$ 86/bbl on 17 October. According to BMI, Congo-Brazzeville is in a better position relative to its peers due to the fact that it runs a large fiscal surplus. The same cannot be said for Equatorial Guinea, which had the second largest budget deficit in 2013 and the greatest reliance on crude oil revenues for its budget out of the net exporters. Nigeria’s 2014 budget assumes an average oil price of US$ 77.50/bbl, below spot prices. However, the fiscal accounts will remain under pressure in the near term at least as spending is ramped up in the lead up to the February 2015 general election.
External accounts under pressure
Oil producers’ external accounts will also be battered by the precipitous decline in prices. Chad, Nigeria, Sudan and Cameroon are the most vulnerable as they rely on oil earnings for a large proportion of export revenues and also run only marginally positive or negative trade account balances. Of these four Chad and Sudan are especially susceptible due to low levels of foreign exchange reserves.
Lower oil prices also pose risks to the external accounts of SSA’s oil producers as foreign direct investment inflows to oil sectors could decline amid falling margins. In addition to the external accounts, this would have implications for headline growth in the countries in question, BMI highlights. At risk is ultra deepwater exploration off the coasts of Sierra Leone, Liberia and Cote d’Ivoire and pre-salt projects in Angola. Nigeria’s offshore acreage has lower breakeven costs than many regional peers, at approximately US$ 50/bbl, but lower margins could give foreign investors, who face uncertain policy and a difficult business environment, further reason to delay investments. Also at risk are LNG projects in East Africa given that LNG prices are quoted in ratios of oil prices. Mozambique is further along the development path than neighbour Tanzania so the latter is likely more susceptible to lower prices.
Small boost for oil importers
SSA’s net oil importers, which include all countries bar the 12 listed above, stand to see an improvement in their terms of trade as a result of lower oil prices. All else equal, this should lead to an improvement in these countries’ external positions, with Senegal, Tanzania, Zimbabwe and Kenya, set to benefit the most. These countries all run large trade account deficits due, in part, to a heft oil import bill. Although this ostensibly will be positive for currencies, BMI believes that appreciation against the US dollar will be curtailed by broad greenback strength as well as by current account deficits and high inflation, limiting the extent to which currencies appreciate against the dollar.
BMI also expect the disinflationary impact of lower oil prices to be limited. The fact that currencies are unlikely to appreciate despite improving terms of trade will mean that imported disinflation will be insignificant. Furthermore, the transport sub-component of the consumer price index (CPI), which is arguably the most susceptible to oil price fluctuations, remains below the headline figure in many countries suggesting that oil prices are not currently sources of inflationary pressure. The possible exceptions to this are Ghana and Kenya, where the annual price growth of the transport sub-component comfortably outpaced headline inflation in September. Some of this is explained by currency weakness but sustained lower oil prices could help to alleviate headline inflationary pressure in these two countries decline thanks to a slower rate of growth for the transport sub-component.
Adapted from a report by Emma McAleavey.
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