Tuesday, December 06, 2016 11:14 AM/ BMI Research
BMI View: The decision by OPEC to cut production will see modest economic benefits for Sub-Saharan Africa's oil producers, offering tailwinds to fiscal revenues and investor confidence. Nigeria will be the big winner in the region, with stronger oil revenue growth set to support the country's expansionary fiscal policy and give the government greater room to negotiate with militant groups.
The recent agreement by OPEC to remove 1.2mn barrels per day (b/d) from global oil markets will have a more positive than negative impact on Sub-Saharan Africa. For non-OPEC oil producers (such as Congo-Brazzaville) and those OPEC members that have been exempt from paring back output (such as Nigeria), the agreement is a purely positive thing.
Likely to put a floor under Brent crude prices, the deal will bolster fiscal revenues for oil producers, allow governments greater certainty when budgeting and give investors greater confidence in the outlook for the hydrocarbon sector.
Indeed, while we are not revising up our forecast for Brent crude - we continue to expect it will average USD55.0/bbl in 2017 - should OPEC have failed to come to an agreement, the price likely would have been noticeably lower (around USD45.0/bbl) and markets would have been prone to significantly greater volatility.
It will have a more mixed, but still largely positive impact on the region's OPEC members Angola and Gabon. These countries will face a cut in oil production, likely to weigh on real GDP growth, but their fiscal positions will see crucial concomitant gains.
On the other side of the equation, sustained higher oil prices will offer headwinds to the region's oil importers. We note though, that with prices set to remain low by historic levels, the negative impact will be constrained for most countries.
Mixed Bag For OPEC Members
While Angola and Gabon will see some immediate economic headwinds from the OPEC deal, if the deal holds, it will also offer at least modest benefits for both economies. The deal stipulates that Angola will be expected to cut its production by 4.5% by January, targeting 1.7mn b/d over 2017.
As such, while we had anticipated that increased oil output would be a key driver of real GDP growth for the ailing economy, forecasting the economy to expand by 2.2% in 2017 after growth slowed to a projected 0.7% in 2016, this deal poses significant downside risks to growth and will likely cause us to revisit our forecasts in the coming weeks ( see 'Increasing Oil Output Will Offer Only Temporary Boost To Growth', November 24).
That said, the country's fiscal dynamics will see some benefit from greater price stability, with crude accounting for around nearly three-quarters of the country's intakes. Indeed, modest uptick in fiscal revenues on the back of stronger crude prices will allow the country to better manage its elevated public sector debt burden, which we believe will exceed 70.0% of GDP by end-2016.
The deal will have a similar impact on Gabon. While the country is attempting to move away from its heavy reliance on the oil sector through reforms to diversify the economy and make it more business friendly, crude production still accounts for almost a quarter of nominal GDP, as well as 67.8% of total exports.
As such, the planned 9,000b/d cut (4.5% of its prior production) will weigh on growth in 2017, suggesting downside risks to our current 4.1% real GDP growth forecast. That said, after a massive ramp up in spending ahead of the 2016 elections, Gabon's fiscal position would also benefit from the higher oil prices following the OPEC decision.
Non-OPEC Members Set For Steady Gains
While we see a somewhat mixed impact for most OPEC economies, Nigeria is likely to be one of the big winners, with the deal set to provide some much-needed fiscal and political stability for the West African giant.
After facing a sizeable number of attacks on its oil and gas infrastructure in 2016, which saw production fall to near-30 year lows, the country was exempt from contributing towards the 1.2mn b/d production. As such, the price stability we expect as a result of the OPEC deal will be purely positive for Nigeria.
The agreement will feed in through a number of channels. It will better position the Buhari administration to negotiate with militants operating in the oil rich Niger Delta region. Namely, greater oil price stability may allow the government more leeway to resume amnesty payments to these groups, the curtailment of which was a major contributing factor to the 2016 unrest.
We had already anticipated production to rise in 2017, and greater than anticipated progress in the talks between the government and militant groups like the Niger Delta Avengers would only offer upside risk to our output forecasts ( see 'Production To Come Back Strongly In 2017', November 3). Such a deal will also better enable the government to implement its planned expansionary fiscal budget. After largely failing to implement its 2016 spending plans, the agreement would not only bolster fiscal revenues, but also offer greater certainty regarding how much it will have to spend and when.
Similarly, non-OPEC crude producers are also poised to benefits. For the region's third largest oil producer, Congo-Brazzaville, crude has traditionally been a major economic driver accounting for 60.0% of GDP, averaging 87.7% of goods exports between 2010 and 2015 and over 80.0% of total government revenues.
The country is already set for significant oil-driven growth, with new projects being brought online by Total and Eni and greater price stability is only likely to be a positive, potentially incentivising further investment into the oil-dependent economy.
Risks Lie To OPEC Deal Lie To The Downside
While our O&G team's core view is that the deal will hold, at least initially, the stability of the agreement will depend heavily on non-OPEC countries, most notably Russia. Should we see issues with compliance, especially from these non-OPEC countries or a stronger than expected revival of the US shale sector in the wake of greater price stability, this would have negative implications across the region.
Hardest hit would be those OPEC members such as Angola and Gabon that pared back production, though non-OPEC countries would not escape unscathed, with a sharp downturn in oil prices likely to drive up fiscal deficits and weigh on investor sentiment toward these countries, both increasing borrowing costs and limiting scope for any return of investment.