What COVID-19 and the oil price slump means for Africa

COVID-19 AND THE OIL PRICE SLUMP: WHAT IT MEANS FOR AFRICA

In Africa, the twin challenges of the coronavirus pandemic and subsequent drop in oil prices are affecting countries in different ways − net energy exporters are braced for headwinds, but net importers have some relief from current account pressures.

GLOBALLY, LOCKDOWN AND social distancing has resulted in a sharp drop in demand for oil. The price of Brent crude fell from just under $US59 a barrel on February 19 to a 20-year low of around $US20 a barrel in late April, before an agreement from OPEC+ countries to slash global output helped prices recover to around $US41. In late April, with storage capacity running dangerously low in the US, the price of WTI crude oil futures plummeted into negative territory for the first time. The slump was felt by Africa’s net energy exporters, which often rely heavily selling hydrocarbons.

With annual budgets premised on higher oil prices, many governments have cut expenditure or sourced extra finance, such as Nigeria. While oil makes up about 10 per cent of the country’s GDP, it accounts for 57 per cent of government revenue and more than 80 per cent of exports. In its June “Global Economic Prospects” report, the World Bank predicted that Nigeria's energy sector will shrink by 10.6 per cent this year. The government’s revised budget, altered the benchmark oil price from $US57 a barrel to $US25, while $US5.5bn in extra loans will help fund the new deficit.

Austin Avuru, CEO of Seplat Petroleum, told Oxford Business Group that, while the company

Image Credit: Adobe Stock

2020’s oil price slump was a double whammy for the African oil and gas industry, along with the impact of the COVID-19 pandemic.

was continuing to invest in gas projects, efforts were being made to reduce operational spending: “Overall, our target is get close to a neutral cash flow position in 2020. So the main target of our budget restructuring is to be able to survive FY 2020, with the hope that during 2021 prices will climb back and we will manage to resume our planned investments. Meanwhile, in 2020 the key word is survival.”

Low oil prices are set to have a significant impact on Angola and Algeria. In Angola, where oil makes up 90 per cent of total export revenues, the value of oil exports fell by nearly 50 per cent from April to May, while in Algeria, which derives more than 90 per cent of export revenue, the government announced in May that it would slash the 2020 national budget by 50 per cent.

In an indication of the importance of oil prices to the wider business environment in producing countries, while 34 per cent of respondents to OBG’s Africa COVID-19 CEO Survey said that the fall in prices would affect their company’s recovery plan, this rose to 60 per cent in Algeria and 65 per cent in Nigeria. While they are not immune to the economic fallout of COVID-19, net energy importers will be better insulated from the effects of low oil prices. Countries that do not rely on energy exports for a significant portion of national revenue will not directly suffer from the fall. Those that source their energy from abroad will see some benefits from lower oil prices. But the World Bank has warned that the prospective benefits for energy importers will be minor comparied to the broader economic damage of virusrelated lockdowns.

“In the context of the current restrictions on a broad swath of economic activity, low oil prices are unlikely to do much to buffer the effects of the pandemic, but they may provide some initial support for a recovery once these restrictions begin to be lifted,” the June report stated.

One benefit from lower oil prices could be energy subsidies. Analysts have suggested that reformed subsidies in energyimporting countries, such as those seen after the oil price slump of 2014-16, could free up public funds for other pandemic recovery efforts.

Net importers are set to fare far better than exporters. According to the World Bank, MENA oil importers are expected to experience a 0.8 per cent average fall in GDP this year, compared to the 5 per cent average contraction projected for oil exporters in the region. In sub-Saharan Africa exporters are tipped to post a 3 per cent fall in GDP, slightly above the overall average of 2.8 per cent. 