How is Africa oil coping through crisis?

Africa’s OPEC member countries are facing sternly challenging times with the 45% drop in oil prices in March 2020 due to the double blow of extremely suppressed demand from the COVID-19 crisis coupled up with the supply side impact of a potential glut as Saudi Arabia and Russia jostle in disagreement on production output policy in the so-called OPEC-Plus arrangement. The over-reliance on oil and gas export revenues for these African countries particularly the larger ones reveals how such high exposure in the modern globalized and interconnected economies era of the world presents a high degree of vulnerability in crisis times.

This vulnerability initially plays out in depreciation / devaluation in localized formal and black market foreign currency markets depending on the extent the country follows a fixed exchange rate leaning policy (e.g. Nigeria, Algeria) versus a floating leaning (e.g. Angola) one. Further to this there is the double jeopardy that oil, like most commodities, is traded in dollars so periods of low commodity price will tend to co-exist with increased US$ demand and strength as the commodity becomes globally cheaper to purchase in US$. As such, this vulnerability subsequently extends to other areas such as the countries geopolitics, macro and socioeconomic balance. In theory, the weakened currency makes investing into the country for foreign investment cheaper and more attractive however, this effect is drastically toned down in times of crisis or in times of doubt on emerging economies particularly given their associated volatility. We also have to note that with respect to GDP composition and not export revenue, it tends to be that these economies are generally more diversified with bigger proportions of GDP coming from services and other sectors not just petroleum. The concentration of export revenue however means the foreign reserves side of the equation retards GDP per capita growth particularly since a high level of imports are required to supplement what is not being produced locally. Given the concentration, the oil price required to balance the government's budgets becomes an intrinsically key metric.

When juxtaposed with the health care systems of each Africa OPEC member country as measured by Health Access Quality index , it shows that for most, an already vulnerable health care system would have a colossal task in handling a health crisis such as the one we are seeing or similar if it struck with foreshadowed intensity. It is important to note the hazard of something even similar to the current virus crisis in terms of public services strain because of the increased level of natural global risks that exist upon an ever-growing global population both in terms of sheer number and density as well. In this regard, we see increases in occurrences such as drought; air quality deterioration; localized water scarcity; extreme weather and related impacts like storms, floods and wildfires; food insecurity; increased plastics in aquatic ecosystems etc. The list is undoubtedly uncomfortably long and probably even longer.

It is therefore critical now more than ever going forward for economies, particularly resource bountiful emerging ones, to aim to be diversified and avoid the resource curse cycle. This is the paradoxical situation of stagnant or negative growth despite an abundance of a resource. This occurs because the country doubles down on investment into the abundant resource while pulling investment out of other sectors as well re-investing the resource's profits into the very same industry. The actions required to diversify for the future in terms of resource allocation and stern public governance, require strong political will and as history shows us in countries like Norway, potentially politically unpopular decisions like saving instead of spending export revenues when oil prices are high.

Countries like Mozambique which have just discovered Africa’s 3rd largest gas reserves (approx 3Trillion m³) behind Algeria and Nigeria, will need to keep this mind as they aim for LNG production to start in 2024 after liquification terminal infrastructure is complete. There will therefore be the temptation to shift concentration to this. As an example of concentration shift, Nigeria went from being one of the highest cocoa exporters in the world in the 60s until investments into oil and gas in the 70s and 80s heralded a full shift. Today cocoa exports make up only 1.4%. Care has to be taken additionally because we cant ignore that emerging economies in Africa will have underlying and inherent challenges to overcome in an attempt to avoid spiraling into resource curse territory. These are issues linked to high poverty and unemployment, corruption, under-industrialization and colonial history legacy.

How have other countries fared?

We have however seen countries like Saudi Arabia even with the worlds 2nd largest reserves and lowest oil production cost (approx $9/barrel according to 2019 Aramco IPO prospectus) decide to float a portion of Saudi Aramco and use the capital proceeds raised to diversify outside oil and gas. This is mainly in sectors like technology as part of the 2016 launched Saudi Arabia Vision 2030. This vision includes the creation of a $500 billion smart internet- of-things and 100% renewable energy run megacity, Neom, in the north-west corner of the country which will span an area 3 times the world's current largest metropolis, New York. Another interesting case is of Norway who commenced oil production in the North Sea in 1980 and established a sovereign wealth fund in 1990 now valued at $1.2Trillion making it the most valuable sovereign wealth fund in the world. Today, despite all the success oil and gas has brought to the Scandinavian country, it represents approx 55% of export revenue with sizeable portions coming from other sectors like fisheries, metals and wood.

Circumstances will certainly differ from country to country but ultimately, as the saying goes popularized in Miguel de Cervantes’ famous 17th century satirical novel, The Ingenious Gentleman Don Quixote of La Mancha ,"tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.”

by Tare Kadzura ACMA CGMA EMME