By Kurt Davis
Oil prices are tanking. Oil prices are rising. Oil prices are tanking again. Oil prices are rising again.
It is the constant storyline in the early days of 2018, but a high oil price has a downside for some countries in sub-Saharan Africa.
Those bullish on the price have their reasons. Cold weather in the United States. Saudi-Iranian tensions. Production cuts. A stockpile of inventory is down. Traders are pushing it up. The list goes on.
Those bearish on the price have their reasons. Increasing inventory and more rigs coming online across the globe. Regional tensions are exaggerated. OPEC cannot keep production down. This list goes on too.
The reality is that all the prophets and fortune tellers are a little off…so this article will not try to predict prices. The other reality is that an oil price rebound may simply not be the best outcome for some countries.
Africa’s largest economy could benefit from higher oil price. That is true and should not be ignored. That aside, the country requires more diversification in its tax revenue and weaning off of oil is still a process. Falling oil prices originally provided President Muhammadu Buhari some leeway to push reforms.
Still, more change is needed inside the oil & gas industry as well as outside it. More local refineries could reduce the cost of providing petrol to the local economy, compared to the higher cost associated with importing such products at the moment. Such import costs underline the fuel subsidies that the government deemed too expensive to pay in 2016.
The government also needs a boost in tax revenue from non-oil sources….the economic growth and spending in the country has too long been hostage to the cardiac nature of prices. Yet, as the theory goes, it is easier to dedicate spending to a known revenue generator than other sectors you hope to jumpstart into greater growth.
Africa’s fourth-largest oil producer put in a budget increase for 2018 after cuts in 2017. Economic growth struggles with sub-1 percent estimated growth in 2017 and a slight bump to 2.7 percent in 2018, according to the International Monetary Fund. The economy depends heavily on oil for approximately 80 percent of its exports, 45 percent of its GDP, and nearly 65 percent of its budget revenue (give or take 5 percent based on oil prices).
A bump in prices for the country is obviously good (duh!) for the country’s balance sheets. Yet again Gabon is a country that struggles in diversifying its tax revenue and the general economy. A rise in agribusiness-related exports helped to provide light economic support to the country in 2017 and going into 2018. Current numbers, however, suggest that oil is gaining its footing, with production consistent.
Little money is available to fund growth in other sectors because bills have to be paid (as the saying goes) with the country’s $500 million 10-year Eurobond issued in 2015 and the IMF providing $642 million in a loan to cover medium-term recovery costs through 2020.
Economic growth is expected to hit 8.5 percent in 2018 – great news for Ghana President Nana Akufo-Addo. The country will be among the fastest growing economies in the world in 2018. Yet some analysts are closely watching how the government manages its oil ambitions with the Tweneboa, Enyenra, Ntomme (TEN) and Jubilee fields this year against the demand for capital and technical support in the non-oil & gas sectors.
The country is planning the construction of an oil refinery (at an estimated cost of $4 billion) to address the ‘Nigeria’ problem with importing refined petroleum products for local consumption.
Ghana is already spending significant capital on gas imports from Equatorial Guinea and the (longer than expected) onboarding process of gas pipelines in the country. These energy efforts will greatly reduce power costs and boost revenue to the government. Again…this is all great and needed news. But analysts ask what the cost of oil & gas spend will be to other entrepreneurial sectors.
Ghana has a vigorous small and medium business space and energetic entrepreneurs who have done their fair share when oil & gas could not deliver as promised. They will not want to be overshadowed in this new energy age in Ghana.
African investors are watching this oil-exporting country for many reasons. Presidential change is clearly impacting how the country functions with the power shifting. All the change has not necessarily led to any discussion around the long-term dependence on oil.
The sovereign wealth fund, on the back of oil revenues, is bidding well for the country. But the critics rightfully will caution the excitement and watch how Africa’s second largest oil exporter responds if oil prices rise.
Diversifying the tax revenue base and spurring new investment in the country is essential to sustaining long-term investment in infrastructure and other capital-intensive public projects, as well as creating jobs for a young populace.
Kurt Davis Jr. is an investment banker, with private equity experience, focusing on Africa and Middle East. He earned a M.B.A. in finance, entrepreneurship and operations from the University of Chicago and J.D. in tax and commercial law at the University of Virginia’s School of Law. He can be reached at email@example.com.