Africa’s vulnerable oil producers are at highest risk of the impact of lower oil prices. Nigeria’s currency is almost certain to be devalued to protect foreign exchange reserves. Angola will postpone oil sector asset sell-offs and turn to the IMF for another bailout in exchange for painful restructuring. Nigeria and other African sovereigns will also delay Eurobond plans.
On 9 March, Nigeria’s Finance Minister Zainab Ahmed said the government will cut the size of its record USD 34.6 billion budget for 2020 because of a sharp decline in the price of crude. The 2020 budget, passed last December, was calculated assuming crude production of 2.18 million barrels per day (bpd) at a price of USD 57 per barrel. Benchmark Brent crude futures have since fallen to USD 31.4 a barrel. West Texas Intermediate is currently priced at USD 28.8 a barrel.
According to the International Energy Agency (IEA), global oil demand is set to contract this year for the first time in more than a decade as the COVID-19 outbreak causes economic activity to stall. The downward revision comes as oil prices dropped as much as a third this month after Saudi Arabia launched a bid for market share following the collapse of an output pact with Russia. Vulnerable producers will be most exposed to the impact of lower oil prices, according to the IEA.
For African oil exporters like Nigeria, the economic consequences are serious. Crude oil sales make up around 90 percent of foreign exchange earnings in Africa’s top oil producer. The country is still struggling to shake off a 2016 recession, which was caused by the oil price collapse of late 2014, with economic growth currently at around 2 percent. Protracted low oil prices would put pressure on the country’s rapidly diminishing foreign currency reserves and restrict funds for capital projects.
EXX Africa assesses the economic and political risk outlook for some of Africa’s largest oil producers in the one-year outlook based on the current scenario of notably lower oil prices, looming global recession, and continued supply chain disruption.
Will the oil market rebalance in 2020?
The global oil market is heavily unbalanced due to dropping demand and rising supply. Demand for oil has been subdued more than usual because of the coronavirus pandemic. The IEA expects oil demand to be 99.9 million bpd in 2020, lowering its annual forecast by almost 1 million bpd and signalling a contraction of 90,000 bpd, the first time demand will have fallen since 2009. In an extreme scenario where governments fail to contain the spread of the coronavirus, which has affected nearly 150,000 people, consumption could drop by up to 730,000 bpd. Some hedge funds warn oil demand could fall by 10 million bpd for a period of time, a contraction with no historical precedent.
Meanwhile, the oil price war between Saudi Arabia and Russia is adding more barrels to the market. Russia has plans to raise production by 300,000 to 500,000 bpd from next month and Saudi Arabia is aiming at adding close to 3 million bpd to daily production in an attempt to force Russia to reconsider its position on production cuts. Both Russia and Saudi Arabia may also be aiming to diminish the US shale oil industry, which is more sensitive to price movements than both Russian and Saudi oil producers. Only 16 shale companies have average new well costs at less than USD 35 per barrel.
Regardless of the intentions and objectives of the oil price war, the market is being flooded with cheap oil at a time of diminished demand as schools close, people work from home, and travel is being restricted around the globe. There is no firm timeline for the current global emergency, which makes the question on whether the oil market will or indeed can rebalance in 2020 seem impossible to address. The IEA forecasts that following a shock to demand in 2020, oil consumption is likely to bounce back strongly and rise by 2.1 million bpd in 2021. A rebalancing in the oil market may only occur well into 2021 or beyond, according to the IEA.
RISK OUTLOOK FOR AFRICA’S TOP OIL PRODUCERS
Oil exporters will feel the most pressure in Africa, with Angola and Nigeria – sub-Saharan Africa’s two largest exporters – faring the worst. Both have dwindling levels of foreign-exchange reserves and upcoming debt servicing requirements, which will limit the sovereigns’ ability to put in place fiscal and monetary buffers to cope with the oil price fall.
As of 12 March, dollar reserves at the Banco Nacional de Angola were USD 16.8 billion and debt servicing costs are approximately USD 8 billion for this year. In Nigeria, foreign-exchange reserves have fallen 20 percent this year to USD 36 billion. The central bank’s limit before it triggers a devaluation of the naira is USD 30 billion. EXX Africa assesses that both countries are at high risk of defaults and debt servicing distress in coming months.
NIGERIA – NAIRA DEVALUATION LOOMS
With oil prices plunging amid concerns over a price war between Russia and Saudi Arabia, and the coronavirus outbreak obliterating stock markets, Africa’s largest economy is in a precarious position. The International Monetary Fund (IMF) has said it will be working closely with the Nigerian authorities to assess any vulnerabilities which may be exposed by the sharp decline in crude prices, as Nigerian and Angolan dollar bonds sank to record lows.
Nigeria’s 2020 budget has adopted USD 57 per barrel as its benchmark. A new committee including the finance minister, the minister of state for petroleum, the head of state oil company NNPC, and the central bank governor, will determine the size of the budget cut. Nigeria will also increase its oil output, which currently stands at around 2 million barrels per day. However, Nigeria’s path to quickly ramp up production is limited by operational, regulatory, and infrastructure challenges.
The naira is still a classic petrocurrency whose fate remains intrinsically tied to global oil prices, at least without a seismic shift in economic structure. Right now, the stance by Nigeria’s key economic actors to defend the naira will likely be tested by the expected further decline in Nigeria’s foreign reserves – the Central Bank set a USD 30 billion foreign reserves threshold for devaluation. Nigeria is treacherously close. If the central bank strategy fails and Nigeria runs extremely low on reserves, the naira could depreciate, allowing speculators to arbitrage.
Devaluation would lead to increased importation costs for raw materials and other soft and hard commodities that have to be paid for using foreign exchange. A central bank intervention to adjust the value of the naira, is almost certain if foreign exchange reserves run below the threshold set. Recently, low interest rates in advanced economies have allowed Nigeria’s central bank to ease rates locally, but if oil prices continue to come under pressure, putting further pressure on the naira, there will be pressure to hike rates. The combination of rising inflation which is currently at about 12 percent and naira devaluation risks may force the central bank’s hand on rates.
All of Nigeria’s 2020 budget indicators; an oil production volume of 2.18 million bpd, oil benchmark of USD 57, N 305 exchange rate to the US dollar, GDP growth rate of 2.93 percent, and inflation rate of 10.81 percent now appear out of reach, and will most likely result in a downsizing of expenditure plans in 2020.
ANGOLA – SEEKING IMF SUPPORT
While markedly lower oil prices will undoubtedly have broad adverse consequences for the Nigerian economy, the country is not quite as dependent on oil exports as the likes of Angola, which is set to suffer an even more substantial blow this year. After a three-year recession, falling public support, and a disgraced political elite, Angola is struggling to regain its status among investors. Angola’s oil production dropped from 1.8 million bpd five years ago to 1.3 million today. The impact on the economy has been disastrous, with economic output shrinking since 2016 and inflation running at 20 percent. Massive non-performing loans in local kwanza currency have also triggered a credit crisis. The ratio of debt-service to GDP is estimated at over 91 percent.
Angola has hoped for greater US investment in its oil and gas sector as an alternative to Chinese loans. China has borrowed some USD 40 billion in credit and project finance to Angola over the past 15 years (some estimates are much higher). However, the US has been reluctant to become further embroiled in Angola and its investors have steered clear off its banking sector and privatisations. There seem to be only two remaining ways in which Angola can increase its revenues, namely through multilateral assistance and oil asset selloffs. Sonangol has planned to sell many of the exploration blocks in the Namibe and Congo Basins, even though production is falling from existing blocks in these basins. The asset sell-off seems highly unlikely in the current low oil price scenario, thus forcing the government to seek more IMF support.
In late 2018, the Fund committed to a three-year USD 3.7 billion credit facility in exchange for austerity, economic restructuring, and banking sector reforms. The IMF is mandating fiscal discipline that includes unpopular measures such as scrapping fuel subsidies and further devaluing the kwanza. Such painful reforms demanded by the IMF programme will begin to have their effect in 2020. Such policies, if not carefully balanced with meaningful socio-economic concessions, will trigger renewed unrest and industrial action. The government fears the return of unrest on the scale of the 2011 riots and other outbreaks of protests since then.
African sovereigns to delay Eurobond plans
Nigeria’s plans to issue a USD 3.3 billion Eurobond to fund its budget and refinance loans this year will be delayed, after Eurobond yields across emerging markets shot up due to the oil price plunge and the increasing threat of the coronavirus across the globe. Côte d’Ivoire, Benin, and South Africa, which also had plans to issues Eurobonds this year, are similarly likely to postpone any debt issues until markets stabilise.
Yields on Nigeria’s 2031 Eurobond nearly doubled on 13 March to 12.1 percent from 6.8% percent on 21 February – around the time the spread of the coronavirus throughout Europe came to a head. Ghana’s 2029 Eurobond saw its yield rise from 6.8 percent to 10.9 percent and Angola’s 2029 Eurobond saw yields increase from 7.0 percent to 14.2 percent (with a peak at 16.0 percent) within the same time period.
Credit ratings agency Fitch has said that a wave of sovereign downgrades could be forthcoming if oil prices remain at low levels. Africa’s oil-producing countries with fixed exchange rates could be in most trouble. Nigeria has to defend a fixed exchange rate, and during the last market downturn (2014-2016), the government-imposed currency controls to stop the outflow of dollars. There are now again already signs of a shortage of dollars in Nigeria. There are other African countries at risk, including Angola and Gabon, according to Fitch.
Investors have sold off USD 41.7 billion in emerging market stocks and bonds since late January when the coronavirus started to grow worse. The oil sell-off will compound this capital flight. Across the board, Africa’s oil producing countries, including Egypt, Algeria, South Sudan, Equatorial Guinea, and others will face a deterioration in their political and economic risk outlook. Nascent oil sectors in Kenya and Uganda, as well as plans for gas development in West Africa and Mozambique and Tanzania’s Rovuma Basin are likely to be highly uncertain in the current climate.