Fall­ing oil prices af­fect Africa more than Ebola

The Star Early Edition - - BUSINESS REPORT INTERNATIONAL - Ed Cro­p­ley

PLUNG­ING world oil prices have dealt a blow to Africa far greater – in purely eco­nomic terms – than Ebola, set­ting back in­vest­ment in ex­plo­ration and plans to in­dus­tri­alise.

The high­est pro­file vic­tim so far has been Africa’s top pro­ducer, Nige­ria, which was forced to de­value its naira cur­rency by 8 per­cent this week after the cen­tral bank ad­mit­ted dwin­dling re­serves were mak­ing it hard to de­fend it.

In dol­lar terms, the de­val­u­a­tion knocked $40 bil­lion (R438 bn) off the value of Nige­ria’s econ­omy – con­sid­er­ably more than the $32bn worst-case sce­nario the World Bank pro­jected in Oc­to­ber for Ebola’s eco­nomic im­pact on the en­tire sub-Sa­ha­ran re­gion.

Last week, the bank’s chief Africa economist said the lat­est as­sess­ments of the epi­demic sug­gested the eco­nomic fall­out might not be as bad as feared, and would prob­a­bly be closer to the $3bn to $4bn end of its pro­jected range.

The same can­not be said for crude-backed African cur­ren­cies. Even after the Nige­rian de­val­u­a­tion and a 100 ba­sis point hike in in­ter­est rates, the naira came un­der more pres­sure, trad­ing at a record low of 178.85 (R11.005) to the dol­lar.

It opened flat yes­ter­day around 177, a level that is al­ready weaker than the de facto 176.40 lower limit of the cen­tral bank’s tar­get band, re­veal­ing scep­ti­cism the cur­rency can hold at that level.

In An­gola the kwanza has shed more than 3 per­cent since Septem­ber, hit­ting record lows amid con­cerns about the state of gov­ern­ment fi­nances. A year ago, Luanda was pro­ject­ing growth of 8.8 per­cent with a fis­cal deficit of 5 per­cent of gross do­mes­tic prod­uct (GDP) as it poured cash into re­con­struc­tion from a long civil war that ended in 2002.

But its spend­ing plans were all pred­i­cated on oil – which ac­counts for half of GDP and 90 per­cent of for­eign ex­change earn­ings – at $98 a bar­rel.

The gov­ern­ment is bud­get­ing a more sober $81 for next year but even that might be over-op­ti­mistic after Brent crude hit a four-year low yes­ter­day of $76.

Re­serves are at a rel­a­tively healthy $27bn – enough to pre­vent a full-scale cur­rency blowout, an­a­lysts say – but if oil stays be­low $80 for some time, the kwanza will con­tinue to weaken and the bud­get deficit will bal­loon.

The re­sult is likely to be re­duced spend­ing, an in­crease in for­eign bor­row­ing, ei­ther through Eurobonds or syn­di­cated loans, and pos­si­bly an In­ter­na­tional Mon­e­tary Fund (IMF) bailout, as hap­pened after the 2008 fi­nan­cial cri­sis.

“If there’s no support for oil prices, the bud­get deficit could be much larger than 7.6 per­cent and then you could see an IMF pro­gramme,” Sa­man­tha Singh, an African cur­rency strate­gist at Stan­dard Bank, said.

Although they have agri­cul­tural po­ten­tial, the likes of Nige­ria and An­gola im­port almost all food and con­sumer goods, which will be­come more ex­pen­sive, fu­elling in­fla­tion and even rais­ing the prospect of so­cial and po­lit­i­cal un­rest.

Weak­en­ing cur­ren­cies also make im­ports of ma­chin­ery more ex­pen­sive, ham­per­ing Africa’s ef­forts to cap­i­talise on above-av­er­age growth rates by build­ing in­dus­tries to em­ploy the mil­lions of young peo­ple en­ter­ing the labour mar­ket each year.

Ghana, which be­came an oil pro­ducer in 2011, has al­ready had to go the IMF route to try to sta­bilise a plung­ing cedi and pull it­self out of a fis­cal cri­sis caused in part by lower-than- ex­pected oil re­ceipts.

Even beyond sub-Sa­ha­ran Africa’s es­tab­lished oil pro­duc­ers, which also in­clude Equa­to­rial Guinea, Chad, Su­dan and South Su­dan, the ef­fects are be­ing felt as fron­tier ex­plo­ration projects con­tem­plate shrink­ing mar­gins. – Reuters


Nige­ria’s Diezani Ali­son-Madueke, the min­is­ter of Pe­tro­leum Re­sources and al­ter­nate pres­i­dent of the Opec con­fer­ence, at the oil pro­duc­ing car­tel’s head­quar­ters in Vi­enna, Aus­tria yes­ter­day. Nige­ria is Africa’s high­est pro­file vic­tim so far of the plung­ing oil price. The cen­tral bank has been forced to de­value the naira as dwin­dling re­serves leave the bank un­able to de­fend the lo­cal cur­rency.

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