By Rafiq Raji, PhD
Commodity prices have been rising for the past year. As at end-January, gold, copper and brent crude oil prices were up more than 10 percent. Since oil producers’ cartel, OPEC, Russia and a couple of other producers agreed to cut production by about 1.8 million barrels per day from January 2017, brent crude futures have been ascendant, breaching the $70 per barrel mark in January, from $55 only a year ago; a 25 percent gain. The expectation is that crude oil prices would be at least $60 this year, with the most optimistic forecasts as high as $80. Bulls reckon gold, up about 12 percent year-on-year at $1,340 an ounce (30 January), could breach the $1,500 mark in 2018, as likely heightened geopolitical risks increases its safe haven appeal. Copper, which was up 20 percent to $319/lb in late-January, is expected to maintain its upside trend as well; on likely strong China demand and supply disruptions in tandem.
In late January, Kemi Adeosun, Nigeria’s finance minister, boasted about her country’s supposedly newfound resilience to the volatility of crude oil prices. “We’ve gotten to a point where we don’t care”, Ms Adeosun told Bloomberg in an interview, adding that the government’s books would be in the green with oil prices of $45-$46 a barrel. A day after her assertions, brent crude futures breached the $70 mark. “I really try very hard to ignore the oil price”, Adeosun added. Fact is, the Nigerian economy, technically diversified though it is, with oil just accounting for 10 percent of output, remains very sensitive to the oil price. When oil prices dipped for a sustained period below $50, the economy went into recession. And when oil prices recovered above the $50 threshold, the economy started growing again. What is important is that it seems the finance minister is not allowing the improved crude oil price outlook make her become complacent; choosing instead to hold on to the lessons garnered during the very difficult downturn. Like the finance minister, the central bank governor, Godwin Emefiele, now has a spring to his steps. Foreign exchange reserves accreted to more than $40 billion in January, from pitiable levels of about half that and lower earlier. Such is the buoyant mood among the managers of the Nigerian economy that Mr Emefiele believes FX reserves could easily be about $60 billion in a year or so. In the central bank’s case, a specialist FX trading window for exporters and investors boosted hard currency flows tremendously. Consequently, the central bank has had to intervene less, boosting reserves. In a nutshell, the Nigerian authorities may be acting smarter this time around. But they are not alone.
In January, Angola gave up its US dollar currency peg, opting for a partial float for the kwanza. There is more in store it seems. A local newspaper reported that Jose Massano, the Angolan central bank governor, was aiming for a full float by the second quarter of 2018. But why make such a move now when crude oil prices have recovered quite well? Mr Massano feared the depletion of his country’s FX reserves to scary levels if the status quo was maintained it seems. At about $14 billion at the end of 2017, after falling by over 30 percent that year, the central bank was said to fear as much as half of the reserves could be lost this year. Could it be, though, that Angolan authorities fear the current $60-$70 oil would not be sustained for long? This is not entirely without merit. Cheaper forms of mobility in the near future are why. Electric, autonomous and on-demand transportation could be mainstream as early as 2030, when Stanford University disruption and clean energy researcher Tony Seba reckons 95 percent of passenger miles would not be via fossil-fuelled vehicles. Such a scenario is scary for oil producers. In tandem, crude oil prices are expected to tank to as low as $25 by 2021; regardless of any supply management measures by the oil producers. There would simply not be as much need for oil. It would be prudent then for African oil producers to begin planning towards that reality before it dawns. Judging from the Nigerian and Angolan cases, it seems like that they are already doing so. But would the positive trend be sustained?
How about other African commodities producers? Are they being similarly prudent?. Gold producer South Africa has been on a populist drift lately, as its embattled president, Jacob Zuma, tries to embellish his tainted tenure at the helm thus far. A free higher education policy was announced in December, for instance. While on the face of it, this is not expected to overly weigh on the fiscus, there are reasonable expectations of a strain on the government’s finances when the full costs of the policy are finally reckoned properly. Another gold producer, Ghana, which is also the world’s number 2 cocoa producer, has thus far been doing the right things under the 1-year old Nana Akufo-Addo government. In late January, the Ghana Cocoa Board (cocobod) announced it would, from the next season, stop paying subsidies to farmers. Instead, prices the board pays cocoa farmers would follow the international price trend for the crop. The move may have been motivated by the bearish outlook for cocoa prices this year, as bumper harvests are expected in Ivory Coast, the number one producer, and indeed Ghana itself. Financial difficulties at the board are also why. It has been borrowing from the debt markets to fund much higher payments to cocoa farmers than futures contracts suggest. The cocobod plans to pay 984 million cedis in subsidies to farmers in the current season, for instance. And during the previous administration, corrupt practices at the board left it with a pile of debt that a planned $556 million debt sale announced in late January would help to service. In general, though, the Akufo-Addo government has shown remarkable fiscal prudence. About a quarter of payments owed contractors was paid in January. And public debt was pared down to 68.3 percent of GDP in 2017, below the 71 percent target.
There has been a rise in hard currency debt issuances by African countries, though. Nigeria, which issued a $3 billion eurobond in late-2017, plans another one of $2.5 billion in the first quarter of 2018. Kenya could issue a $1.5 billion 10-year eurobond by early March, Reuters quoted sources in late-January, after reports the authorities requested for proposals from banks to issue foreign debt of as much as $2 billion late last year; albeit the amount that could be issued has not been officially confirmed (as at end-January). But “there will be a roadshow in mid-February”, Central Bank of Kenya governor Patrick Njoroge told the media at this year’s World Economic Forum in Davos. Copper producer, Zambia, is opting for local debt to finance its budget in 2018, however. Finance minister Felix Mutati told Bloomberg in October 2017 that it was principally for cost reasons: “when you look at the cost parameters of foreign-denominated instruments of borrowing and you add the exchange-rate risk, you find that you are better off borrowing on the local market”. Considering Zambian authorities plan twice as much borrowing as the last fiscal year, albeit from the domestic debt market, they must be hoping the improved copper price trend would be sustained.
An edited version of the article was published by Africa Investor magazine in Q1 2018