08 September 2022: A dire picture is beginning to emerge across the African continent, most notably for countries with large oil and food-heavy import bills.
Many African countries are surprisingly ill-equipped to benefit from the commodities boom, and some experience heavy fiscal bleed via fuel and food subsidies to alleviate the burden on the consumer. The result has been that some countries on the continent are experiencing severe distortions in their trade balances.
Nigeria is a country which historically benefited from rising oil prices, but it is producing less than its Organization of the Petroleum Exporting Countries (OPEC) oil quota. Oil production has almost halved from 2.5 million barrels per day 10 years ago to 1.3 million barrels per day in 2021. Not only that, but fuel subsidies have risen to around US$4bn a year (0.9% of GDP, or a staggering one-third of all fiscal revenue). Lack of investment due to naira liquidity constraints, conflict with host communities, vandalism and delays in enacting proper regulations have resulted in fuel shortages, hurting the economy and consumer sentiment. As such, Nigeria’s foreign exchange reserves have fallen despite the oil rally this year.
While rising gas prices benefit Egypt’s gas exports, as a major importer of wheat and grain (subsidised by the fiscus) and alongside their problematic debt burden, they have had to rely on Saudi Arabian aid this year. “Bread riots” following subsidy cuts and increased food prices led to violent clashes in Egypt in 1977, 2011 (the Arab Spring) and 2017.
In Kenya, foreign exchange pressures and a US dollar and fuel shortage have begun to emerge. This is not only due to large oil imports, but a lagging supply of US dollars into the economy via key exports of coffee and flowers. Global trade disruption breeds imbalances in prices.
Decades of easy offshore monetary policy have also enabled certain African borrowers to binge on oversubscribed Eurobond issuances, pushing the weak to the brink of debt distress. This is problematic as the reversal in global trade flows – in part due to rising protectionism and supply chain disruption at ports – is also being mirrored in the financial markets as a reversal in global capital flows. Rampant developed market inflation, quantitative tightening and rising interest rates will hamper the ability of African borrowers to refinance their debt.
Ultimately, debt stabilisation rests on sticking to the spending plan and reducing wasteful expenditure. Fiscal sustainability rests on implementing growth-enhancing reforms and allocating capital to its most productive economic use.
Even for net exporters of mined products and energy on the continent, the commodities boom cannot work wonders alone. The heroes in this story will emerge when they strive to achieve sustainable growth beyond a short-term pricing cycle.
By Thalia Petousis, portfolio manager, Allan Gray