Oil price rally will ease African producers’ pain...a bit - Capital Economics
Africa Economics

Oil price rally will ease African producers’ pain…a bit

Africa Economics Update
Written by Virag Forizs

The rise in oil prices this year is likely to prove insufficient to remove strains in African oil producers’ balance sheets. Currencies in Nigeria and Angola will have to weaken further, and policymakers may turn to more desperate or draconian measures to plug budget deficits. Growth will lag behind regional peers.

  • The rise in oil prices this year is likely to prove insufficient to remove strains in African oil producers’ balance sheets. Currencies in Nigeria and Angola will have to weaken further, and policymakers may turn to more desperate or draconian measures to plug budget deficits. Growth will lag behind regional peers.
  • Oil prices have rallied over the past few months on the back of positive COVID-19 vaccine developments and, more recently, the rollover of oil production cuts by OPEC+ that included a large voluntary reduction in output by Saudi Arabia. At $55pb, Brent crude is currently at its highest level since February 2020 and oil prices will probably reach $60pb by year-end as global demand recovers. (See our Energy Update.)
  • Under the current OPEC+ schedule that includes a quota increase in April, oil output is set to rise this year in Africa’s major producers. In Nigeria, output may reach 1.70mn bpd by end-2021 compared to 1.52mn bpd in December. And Angola’s production could increase to 1.45mn bpd from 1.18mn bpd over the same period. (See Chart 1.) We’ve factored in some non-compliance due to poor track records in both countries.
  • From the perspective of the oil sector’s contribution to headline GDP growth, over 2021 as a whole, Nigeria’s oil output is likely to be lower than in 2020 (by about 1-2%). But that fall is likely to be smaller than 2020’s drop (of 11% compared with 2019). So the drag on GDP growth from the oil sector should ease, by about 1.0%-pt. In Angola, the oil sector will push up GDP growth as annual production is likely to expand by 4-5% this year, after a 10% fall in 2020. This could add more than 4.0%-pts to GDP growth.
  • The pick-up in oil production and prices this year will boost export earnings. By our estimates, this increase will boost Angola’s oil exports by as much as 10% of GDP this year (compared with 2020), although the corresponding figure for Nigeria will be a much more modest 1% of GDP. That should help to narrow large current account deficits, especially in Angola. (See Chart 2.)
  • This should ease pressure on exchange rates, at least on the parallel markets. That said, official exchange rates still look overvalued. Nigerian policymakers will want to maintain a tight grip on the naira. While we think that the official and Nafex rates will be devalued (by 5% to 400/$ and by 8% to 425/$, respectively), this will still leave them far stronger than the parallel rate of 475/$. In Angola, we think that the official kwanza rate will break through 700/$ by end-2021 (from 653/$). Currency falls will keep inflation high.
  • On the fiscal front, Nigeria’s 2021 budget plans set out an ambitious 21% rise in spending. Somewhat rosy revenue projections will probably result in a larger budget gap than the government envisages. Running out of options to finance the budget deficit, we think that the central bank may be pressured to pursue more extreme financial repression policies, including deficit monetisation.
  • In Angola, even after securing substantial debt restructuring and the expansion of the country’s IMF programme, policymakers remain squarely focused on fiscal austerity. But if fiscal consolidation plans fail to make sufficient progress, as seems likely, another debt restructuring will probably be needed.
  • Overall, GDP growth in Nigeria and Angola will lag behind that of regional peers this year. We expect similarly weak recoveries in both countries, with their economies expanding by 3.5%, compared to average growth of 4.9% across Sub-Saharan Africa.

Chart 1: Oil Production (mn bpd)

Chart 2: Budget & Current Account Deficit (% of GDP)

Sources: Bloomberg, Capital Economics

Sources: Refinitiv, Capital Economics


Virág Fórizs, Africa Economist, virag.forizs@capitaleconomics.com