By Qiniso Ntuli
Low oil prices will persist for longer than previously expected, according to most global asset managers, and the most reduced crude oil forecasts for this year are down by as much as 51 percent. US Investment Bank, Morgan Stanley, now sees oil mostly falling through 2016, compared with a previous outlook for prices to rise each quarter this year.
Venezuela said five other members of the Organization of Petroleum Exporting Countries would join non-OPEC producers, Russia and Oman, should an extraordinary meeting be called. There are growing calls for producers around to world to act to stem the decline in oil prices, which plunged to the lowest level in more than a decade last month.
OPEC effectively abandoning its production ceiling in December and Russia pumping at a record is exacerbating a global glut, with US inventories at the highest level since 1930, as the nation’s shale fields remain resilient. Morgan Stanley expects Brent to average $31 a barrel in the first three months of this year and $30 in the second and third quarters. This compares with earlier targets of $42, $45 and $48, respectively.
On a macro level for African economies, the inevitable consequences of relying too much on commodity exports in countries like Nigeria will be noticed in lower profits in tradable activities such as manufactured goods, which inarguably tend to create higher growth rates. And of course, one can imagine that the decline in tradable goods will have severe consequences on any potential growth prospects.
Another example of this wistful reality is Angola, Sub-Saharan Africa’s second-largest oil producer behind Nigeria, whose economy is largely dependent on oil production. According to the International Monetary Fund (IMF), Oil export revenue accounted for close to 97% of total export revenue in 2012.
The country’s excessive dependence on oil export has certainly a direct impact on the macroeconomic indicators. According to Bloomberg Business news, Angola’s President Jose dos Santos projected that the oil revenue will decline to cover 37 percent of spending needs, down from 70 percent last year. Consequently, as it has been sadly observed, the national currency, the Kwanza has plunged 7% against the dollar in the past six months as foreign exchanges has become limited due to restrictions from the government.
Moreover, when we look at East Africa, significant oil discoveries have been made notably in Uganda and Kenya in recent years, which raised the countries’ economic prospects. However, with the recent oil collapse, exploration in the region will most likely slow-down.
In the fight against the resource curse, it is important to note that many sub-Saharan African countries have made significant economic and political developments that have ignited growth in the region during the past two decades. In addition to these changes, other western-style institutional mechanisms namely—commodity funds or sovereign wealth funds—have been adopted in countries like Angola and Nigeria to prevent the resource curse.
Whether these institutions for saving during booms would allow them to continue the financing of major infrastructure projects remains to be seen. To avoid the negative impact of a commodity crisis, commodity exports countries in Sub-Saharan Africa need first and foremost to diversify their economies and progressively decrease their dependence on the commodity export.
We will see how 2016 plays out. ©