Monday, October 24, 2016/ 2.15pm /BMI Research
BMI View: Libya's main rival factions will likely reach a peace deal within the next year, following which the new unity government will be able to gradually restore oil output. This improves the outlook for growth in the Libyan economy from 2017 onwards – although from a very low base, and subject to elevated political risks. We maintain our view that Libya's economy will not surpass its nominal 2012 levels for another decade.
Political rivalry and weak, fragmented security structures have caused Libya's oil output – accounting for as much as 97.2% of exports and 93.4% of state revenues in 2014, according to the IMF – to decline to a fraction of those levels recorded before the 2011 revolution.
Coupled with the H214 drop in global oil prices, this has brought the Libyan economy into a state of crisis. Reserves accumulated under former President Muammar Qadhafi are dwindling, as authorities struggle to finance the country's huge fiscal deficit – estimated at a record-high 43.2% in 2015.
Sustained economic recovery depends on the Government of National Accord (GNA)'s ability to increase oil production and exports – which in turn relies on the body's ability to strengthen political stability by negotiating a peace agreement with rival authorities in Tobruk.
We believe some form of a deal is likely to materialise within a year, though we note that risks of it breaking down will remain high in the medium term, due to the extremely fragmented and fluid nature of the Libyan conflict.
The early-July merger of Libya's rivaling national oil corporations in Tripoli and Benghazi and the GNA's deal with Petroleum Facilities Guard leader Ibrahim Jadhran later in the month to re-open key eastern oil ports marked positive steps towards raising the country's oil output.
That said, subsequent threats by Tobruk-aligned military officials to attack tankers attempting to ship GNAauthorised oil, and reports of Tobruk-aligned Libyan National Army units moving closer to the PFG-controlled Zueitina oil terminal highlight the risk of unresolved political divisions hindering any near-term oil production or export increases.
Nevertheless, we do expect Tobruk – under increasing financial constraints and international pressure to recognise the new unity government – and GNA to reach a peace agreement within a year, which will allow the latter to progress with work to reinstate security and infrastructure needed to restore oil production.
Our Oil & Gas team holds to is forecasts for Libyan oil production to rise 34.4% y-o-y, from 387,000 barrels per day (b/d) in 2016 to 519,000b/d in 2017.
This would see Libya record economic growth from 2017 onwards – although from a very low base. We maintain our view that even with a peace deal in place, the Libyan economy will need another decade to reach its 2012 levels in nominal terms.
Despite a gradual supply-side correction from H216, our Oil & Gas team forecast global oil prices to remain subdued relative to pre-H214 levels in the medium term: the process of restoring oil output to full capacity will be slow, as many facilities are in need of large-scale maintenance work, and will still be vulnerable to attacks by local militias seeking political influence or pay-offs from the authorities.
As a result of these circumstances, we expect unemployment in the country to remain high throughout our forecast period, at around 20% of the total labour force.
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