Low oil prices dominate the economic conversation around Nigeria as the election is stalled and the naira suffers. The country consequently, as Africa’s biggest economy, overshadows the greater discussion on sub-Saharan Africa’s ability to endure a low oil price. But Nigeria is least likely to be the hardest hit as the pressure rapidly builds on the fiscal and external accounts of sub-Saharan Africa’s two other major oil exporters — Angola and Gabon.
Angola’s main source of revenue is oil, as it accounts for 95 percent of export receipts and approximately 70 percent of government revenue. Attempts to diversify the revenue stream of the government remain ongoing with protectionist tariffs introduced in 2014 slowly creating modest change.
Officials reduced the 2015 budget oil price to $40 per barrel in February from $98 per barrel in the 2014 budget and the $81 per barrel for the initial 2015 budget. Budget revenue will probably drop by $15 billion and oil exports will probably fall by $25 billion based on a $50-per-barrel price. Average oil production is expected at 1.81 million barrels per day compared to 1.66 million barrels per day in 2014.
The new numbers altogether suggest the potential for an economic depression in Angola. The revised 2015 budget indicate a potential deficit of 7 percent of gross domestic product, as officials publicly state intentions to maintain spending on infrastructure and other related capital projects as well as support social programs despite any revenue fall. Calls to abolish fuel subsidies will likely intensify, echoing comments from International Monetary Fund Managing Director Christine Lagarde. Evidence suggests that the rich are benefiting from the subsidies and the cost for the government is becoming too burdensome for the benefits it returns.
Some analysts predict political unrest in Angola with more than 25 percent living below the poverty line. But President Jose Eduardo Dos Santos’ adoption of a new constitution, which limits the president’s term to two five-year terms in office, should maintain political stability in the near- and long-term, especially if spending continues on projects beneficial to poor communities.
Yet, even if spending quenches the thirst of Angolans in the short term, officials must find an answer to the growing inflation concerns. Inflation reached a historic low in June 2014 at 6.9 percent year-over-year. Current projections imply a rise in 2015 with potential for the peak to occur in midyear. The $1.4-billion aid program from the International Monetary fund will ease the pain. But if the price sits at $60 or below come June 2015, the markets may give Angola an honest assessment of its economy with tough terms on any new debt issuance.
Gabon probably faces the greatest pressure at home and abroad in this price environment. Protests and strikes in the oil sector dominate the political and social conversation. Thousands have taken to the streets over rising living costs in Gabon – a relatively stable country with a population of nearly 1.7 million.
Similar to their Angolan colleagues, Gabonese officials are intent on maintaining an ambitious infrastructure investment program under the National Infrastructure Master Plan. The program will weigh heavily on the economy and overall fiscal balance at home in this environment with oil revenue accounting for 60 percent of government revenue. The government unexpectedly adopted a plan to produce less oil this year, implicitly accepting the lower oil revenue position. But many analysts expect that this lower production number could be raised by mid-year if the oil price rises.
Officials previously indicated an intention to issue a $1-billion eurobond this year. But all indications from the market suggest that Gabon will not receive a favorable rate thus the country may sit idly until things move in its favor. Absent any alternative solutions for from the International Monetary Fund for raising government funds, the country will be forced to cut spending. The methods or avenues by which officials achieve spending cuts will dictate political stability.
President Ali-Ben Bongo Ondimba, in power since the 2009 election where he succeeded his father and former president Ali Bongo, is certainly most concerned with the stability. Easing political and social tensions nevertheless will not ease financial pressure, but we can assume Ondimba knows this.
Kurt Davis Jr. is an investment banker focusing on the natural resources and energy sectors, with private equity experience in emerging economies. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at firstname.lastname@example.org.