Is Sub-Saharan Africa Producing Nations Ready for the Oil Price Armageddon?
By Sunny Oputa
Sequel to my earlier work in the first week of this year captioned: Will 2015 be Armageddon for Independent Oil Companies, a friend and avid reader of my works, Kwame Seriboe asked that I should have also included in my analysis the impact of the looming Armageddon on the economies of producing nations in Sub-Saharan Africa. It is apparent that Sub-Saharan Africa producing nations are not insulated from the political and economic problems that the falling oil price will trigger globally. Alongside Russia, Venezuela, Iran, Iraq, many other European, Latin America, Pacific Asia countries, oil exporting nations in Sub-Saharan Africa are in jeopardy.
A greater number of the producing nations in Sub-Saharan Africa earn almost 70 -80% of their national revenues through oil exports and about 35 – 60% of the region’s producers GDP are dependent on oil. For instance, 40-50% of the GDP of Angola, Republic of Congo and Gabon are derived from oil and Equatorial Guinea is one of the countries in the region with a very high dependence on oil having about 80% of the nation’s GDP on that natural resources.
Also, Nigeria, Chad, Sudan, Angola, Gabon and Equatorial Guinea are net exporters of oil in sub-Saharan Africa having their major international buyers from United States, China, India, Netherlands, Japan, and France. Before the comatose that the volatility in the price of oil is causing, the resource-rich nations in Sub Saharan Africa had set their national budget on the price of a barrel of crude oil between $100 - $110. At the good times when external environments and market dynamism made the price of oil to look beautiful, it was really a good target for these countries.
With the beleaguering oil market been buffeted by unforeseen forces energized by both internal and external environments the economy of these nations are threatened. To adjust to the market volatility, Nigeria the premier producer in the region changed its budget to $65 per barrel of crude oil, South Sudan to $80, Cameroon hinged theirs to $87,Gabon pedaled down to $75, Angola stepped low to $80 and Equatorial Guinea down to $97 to mention but a few. However, the market trend in which the price of oil has bottomed close to $50 per barrel has shown that the above were budgetary calculations in error which will lead to fatal deficits.
An African proverb says that it is not easy to fathom the extent of dispersion of a bread fruit when it bursts. The same goes with the surging global economic burst that could impact heavily most of the economies as result of the deflating price of crude oil. If the market does not show significant rebound by the 3rd Qtr of this year, it will be a huge global mess that would concoct both economic disaster and political risks of great dimension – plunging many nations into anarchy and penury seeking for international aids.
The current situation has already started to erode off the growth in the sub-Saharan economy before and after the 2009 economic crisis. The ensuing tragedy could be more monstrous than the drama of woes of 2009 which is about been reproduced on a different stage. Before the 2009 global economic catastrophe, the economy of sub-Sahara Africa garnered much traction with remarkable growth at almost 6% with a tremendous drop in inflation. This growth was fuelled by the rising commodity prices, service and agricultural sectors. According to an IMF report on the impact of the financial crisis on sub-Saharan Africa, the hard won economic gains are now at risk.
The colossal fall of the price of oil has negated principles of market economy. The price of oil has collapsed below the $70 beautiful price as was chaperoned by Al Naim, the Saudi Oil Minister meant to be an average price good for investment, operations and normal profitability. It has also fallen deeply below the glorious days of $120 per barrel. The sharp drop in the price of oil has not stimulated increase in demand of the commodity; making the market to be suffocated by over supply. Exports of producing nations in Sub-Saharan Africa is affected and revenues are been crushed.
The economy of sub-Sahara Africa is likely to suffer contraction of about 2%, economic growth will be slow as a result of the drop in commodity price. Adding salt to injury is also the menace of Ebola which has already shaken the foundation of the region’s economy. This surging tsunami will also lead to reduction in foreign direct Investment in the region and decline in the credit rating of most of these countries because of their inability to meet-up paying foreign debts.
The hallmark of this disastrous moment will be devaluation of currencies of these countries as has taken place in Nigeria. Devaluation of currencies which is a deliberate downward adjustment of the currency of a nation relative to the U.S dollar for example, due to market pressures and orchestrated by policy makers has never augured well for African countries. Devaluation would continue to make exports from these sub-Saharan Africa countries to be cheaper (reducing revenue), making imports expensive and possibly triggering inflation with other economic malaises.
The pang of the ongoing situation is already affecting Angola where the LNG market and Lobito refinery has not responded to the market expectations that led to their establishments. The weakening oil market and horrendous drop in the price of natural gas dims the economic hope of Mozambique for now and the envisaged growth could be deferred till another three years. Equatorial Guinea has to respond quickly to avoid an economic slam by finding ways to bring back its aging fields to production and create a viable service oriented economy. Nigeria, Gabon, Ghana for instance should also ensure to bring its numerous marginal fields to stream and back-off from capital intensive deep/ultra deep water projects. More focused on the service industry, financial, telecommunication and agriculture would be the way out for the West African countries. Development of new fields in Uganda, Kenya and Tanzania could be delayed because of the quagmire. However, some of these fields which are onshore may not cost so much to be produced. This could be the worst of time for South Sudan because of the bad pipeline contract in which they have to pay alarming fixed rates.
The looming bad economy in South Sudan could be a recipe for more civil strife in a country which is always 2 inches close to turmoil and political pandemonium. The same could go for Chad and Sudan which are two nations with absolutely poor foreign exchange reserves and lackluster confidence for investors.
It is expected that just as it happened in 2009, if the market does not gain much mojo, pressures from OPEC members especially those that are lacerated by the economic collapse caused by falling oil price will jolt OPEC to cut down production. In the same vein, the weight of the global catastrophe and foreign interests of United States to win her old allies from China and Russian, will make a hawkish Janet Yellen of the United States Federal Reserve to become dovish and advise the government to accept “No Victor , No Vanquish” declaration with OPEC and cause the market to rebound.
To remain afloat until salvation comes, sub-Saharan nations should hold back on some of the petroleum law especially ones that are not investor friendly. This is not a time to play much of local content with the flute as it will only put money in the hands of the few who are already rich and will make the poor - poorer. To ensure economic buoyancy and reduce geopolitical risks, nations in Sub- Sahara Africa should be more focused in building much balanced markets through regional content and regional co-operation. This will create better opportunities, enhanced security, bigger market, alleviate poverty and ensure survival. This is a critical time for the Economic Community of West African States and Economic Community of Central African States to work assiduously to create a softer landing pad for their beleaguered members.