Oil continued its momentous slide dropping below $66 a barrel for the first time since September 2009. Welcome relief for oil-importing countries but not so good for the growing oil-producing countries of Africa. Oil is now down more than 40% from just six months ago when it topped $115, and this has had a massive knock-on effect in countries including Nigeria, which relies on oil and gas for about 70% of fiscal revenue. For more perspective we’re joined on News Leader by Chris Becker; he’s lead macroeconomic and equity strategist at African Alliance.
Chris … so that decision last month by Organisation of the Petroleum Exporting Countries (Opec) not to cut production, fine for Saudi and some of the Middle Eastern producers but not so good for poor producers like Nigeria, and we’ve seen that reflected really in their currency since then?
CHRIS BECKER: Yes, so West Africa and Nigeria, Angola are the big losers from the oil price decline. East Africa most certainly, we think, are going to be big winners, especially the consumers in East Africa, so that is how we see the sort of net costs falling out of the oil price decline. Like you say, currencies are coming under some significant pressure, the Nigerian currency is under a lot of pressure … partly the Nigerian currency’s also under so much pressure relative to the Angolan currency because Angola has managed to save surpluses when the oil price was high.
The Nigerian government, due to corruption, seepages, theft and the like, have resulted … their surpluses and their buffers have been dwindled basically and spent. So there’s nothing to fall back on right now as the oil price comes under pressure so the currency is blowing out…
BDTV: As much as you talk about the East African network seeing, or that region seeing the positive of all of this, what does come to the forefront are those frontier exploration projects because they’ve got to now start to contemplate shrinking margins to a large extent so…to what extend does it actually come to bear?
CB: Yes well it’s interesting … Tullow Oil Plc (TLW) a week or two ago basically said that they would continue with their East African exploration projects in the energy sector, but they would cut back on other frontier market energy exploration projects. So East Africa seems to continue to see the interest. Also North Africa, because of the civil, social and political unrest that they’ve seen … we’ve seen FDI (foreign direct investment) and energy exploration shifting from there down south as well so East Africa is benefiting from that.
And then thirdly, and very importantly, the Japanese, the Indians and the Chinese think in terms of barrels of oil, and they don’t think in terms of dollars of oil and what it’s going to cost to secure barrels of oil for future economic growth. So if any private-sector disinvestment from exploration projects or energy development happens, we’re going to see the Chinese saying thank you very much we’ll take that. If we want to secure our future this is perfect for us.
BDTV: Do you think that at any oil price, do you think they’re looking past the short-term decline receding in the oil price at the moment?
CB: Yes they plan for 10-20 years in advance so they would be looking through any sort of short-term sell-off of the oil price. Like I was saying they think in terms of barrels of oil, ounces of gold, in terms of kilograms of resources.
Part of their long-term strategy, and you can see it coming through in the way that they reinvest in surpluses, trade and current account surpluses and the like, is they’re sending less money into American Treasury Bills, which is a claim on a dollar which is depreciating over the long term and rather lending money to pariah states like Zimbabwe and tying up collateral that’s got gold and diamonds. So that’s their strategy, they want to tie up hard assets, real assets for the long term.
BDTV: At what point do countries like Nigeria start listening more intently to the fact that they’ve got to start diversifying their economy a lot more…this shows once again the risks posed by relying on one revenue source?
CB: Yes, the impact on the Nigerian consumer and general economy relative to the elite is not going to be as great because firstly there hasn’t been a major trickle-down of oil revenue to the average man on the streets in Nigeria. That’s the first point and it’s important, it’s an important one.
So, a lot of the costs of this oil price decline are going to fall on the Nigerian governments and elite people essentially, big corporations, business owners, that’s where the costs are going to fall. And then secondly yes, Nigeria and a lot of African commodity countries have suffered from this resource curse as people call it. Big oil revenues, a high oil price and a commodity super cycle has benefited those sectors but also prevented a diversification of the rest of the economy so … possibly and it’s a hopeful and sort of the more optimistic high road scenario, is that with a much deeper oil price decline and a price that stays around these levels, reform is forced on some of these economies and especially a place like Nigeria and that would be a great thing.
BDTV: But for now though what the man on the street is going to have to contend with is rising inflation because this is putting pressure on the Naira currency for example and Nigeria and Angola for that matter import most of their food and consumer goods?
CB: Yes bear in mind the fuel price and the food prices and electricity spend to the Nigerian consumer comes to about half the typical spending per month. So food prices under pressure at the moment, agricultural prices have fallen about 30% at the farm gate level globally, so raw commodity prices, foods, and the fuel price is under pressure so…half of what typical average Nigerians spend their money on are seeing price declines at the margin, so I don’t think it’s a very inflationary environment. The weaker currency, the weaker Naira could actually just lead to an unchanged price level so it’s one of the factors why I think we might not see significant social or political unrest from people on the streets ahead of elections next year in Nigeria.
BDTV: How about a country like Ghana, it only became a significant producer after 2011-12 but already is in trouble due to lower than expected oil receipts … has it become too reliant on oil in such a short space of time?
CB: No I wouldn’t say so, oil has become quite a big export category so it accounts for about a third of exports or at least in weight similar to gold and cocoa, so it has become important but ultimately estimates right now are that in the next three or four years Ghanaian oil output is going to double from here.
They’re looking at another 150% increase, so more than double actually so part of the problem in the last few years is that oil output has actually underperformed expectations, now the price is coming under pressure, so overall yes oil export receipts aren’t going to be growing very strongly. But if they can stick to targets and hit them, perhaps a bit optimistic but there’s big upside in terms of volumes of oil that can be produced and exported…
CB: … so I think net-net it’s not a particularly negative story.
BDTV: Yet they’ve approached the International Monetary Fund (IMF) already for assistance, so was that justified, was it warranted?
CB: Yes most certainly they need budgetary support, so we haven’t seen any long-term Ghanaian bond issuance recently. Foreigners are literally stepping away from the market, not even Ghanaian locals are interested to buy long-term debt in Ghana right now so it speaks to some very critical structural budgetary issues that need to be addressed and we think at African Alliance, that’s partly why they’ve approached the IMF. The ruling government at this point isn’t getting a lot of popular support, if they had to start enforcing fiscal discipline on the people and slowing civil servants’ wage growth right now, they’re going to get a big political backlash.
We think they’re approaching the IMF to help them restructure the fiscus and that could in a sense deflect any political backlash that comes from the public onto the IMF and not onto the government. So there’s sort of two sides to the story but ultimately they need financing in the short term, the oil output is only going to come longer term three to four years from now.