The sustained low oil price environment has raised concerns about the sustainability of development (and consequently debt and credit levels) in sub-Saharan Africa.
Africa’s top two oil exporters, Nigeria and Angola, continue to face adverse effects at home. Nigeria plans to borrow $1.5 billion in the next couple months and, in a sustained low oil price environment, potentially $6-8 billion by the end of the year. Angola plans to borrow $10 billion this year, including already issued $1.5 billion Eurobond. The country is further asking the World Bank for a $1 billion credit line in addition to approaching China (behind the scenes) for additional monies.
As the low price environment spreads to other commodities, growing concerns over the abilities of sub-Saharan African countries to pay bills will heighten scrutiny in international capital markets. Absent an upswing in prices in the near-term, capital markets may punish a few exporters in the bond markets in the near term.
This week’s article highlights sub-Saharan Africa’s most vulnerable non-oil, commodity exporters:
Zambia
Zambia faces the biggest economic vulnerability with copper accounting for nearly 70% of the country’s exports. Copper prices remain down approximately 18% since July 2014. Election uncertainty adds to local and international concerns. The wait for a new president to fully implement an economic strategy likely indicates a delayed resolution to the growing tensions between the government and the country’s mining sector. A combination of continued spats over tax refunds and electricity supplies amongst other things has some investors concerned about investment and production in the short term.
All those concerns stated, Zambia is expected to get a breather in the form of money from the IMF. A strong commitment to fiscal responsibility, including well-managed commodity revenues in recent quarters, could possibly limit the downside effects. The economy will still grow nearly 6.7% after adjusting for a potentially low copper price throughout 2015 which would still be higher than the 6.5% in 2014.
Ghana
Ghana is always the mix-bag country on these types of lists. Investors love its upside with potential for growth in oil exports and the large deposits of other commodities. But the financial crisis that consumed 2014 and greatly hurt the Ghanaian Cedi dimmed the lights on the country’s bright outlook. The rising debt levels have become an intense concern and tension as the government tries to implement fiscal adjustment measures in the midst of continued negotiations with the IMF for financial relief.
Its dependency on cocoa, gold and oil for 80-85%of its exports only furthers credit concerns amongst investors in a low price environment. The trade balance is already negative and the country is one of the few countries that sees a drop in its trade balance as oil prices drop, albeit not anywhere near the levels of Nigeria, Angola and Gabon (where oil accounts for nearly 85% of the country’s exports). Cocoa prices are expected to continue a slow drop throughout 2015 with gold prices expected to stay below 2014 prices throughout the year. Altogether, the outlook for Ghana is balanced with moderate commodity risk. But absent improved financial management, the risk could grow exponentially with a weak currency.
South Africa
The long-term fundamentals of the South Africa are ever-so strong. The country is home to an immense supply of natural resources and a strong financial sector. But the results in 2014 would largely suggest everything is not positive. Strikes and clashes with the government and private companies spelled trouble for the country at a time when global demand for commodities slowed.
The fall in prices for gold (2%), iron (47%) and coal (25%) only burdened a fragile mining sector. A huge rebound is not predicted in 2015. But it can be expected that the country will capitalize on a lower oil import bill. Yet a lower import bill will not completely cure the budget deficit and address emerging concerns over the country’s current account balance. A weaker rand (for exports) and a balanced budget nevertheless could be a boost for country, especially if it can be achieved under the renewed leadership of the African National Congress (ANC). It would be a boost for the ANC and a boost for South African economic morale.
Potentially Increasing in Risk Over Time (2)
Namibia and Tanzania
The drop in cocoa prices through the end of 2015 will raise concerns for officials in Cote d’Ivoire as it is a major cash crop, particularly for poorer Ivoirians. The country in its entirety should however easily endure the fall as its spending on infrastructure and other large projects have been slowed until the election. But any election disruption would be detrimental in the short term.
Namibia will likely maintain a growing infrastructure budget in the face of any declining price environment. The message coming from the government is one of very high confidence in the higher prices for uranium. Although prices are down for diamonds, they still generate significant income and, when combined with uranium account for ~39% of Namibia’s exports. Investment in gold and uranium mines also suggests increased production over time and strong price expectations over the long term. But the country must be careful not to financially overextend itself in spending in these early stages of investment and expansion because non-oil commodity prices are better at surprises than their fickle oil price cousin.
