Plunging prices deal blow to Africa crude explorers

(MENAFN- Arab News) JOHANNESBURG: Plunging world oil prices have dealt a blow to Africa far greater in purely economic terms than Ebola setting back investment in exploration and plans to industrialize.

The highest profile victim so far has been Africa's top producer Nigeria which was forced to devalue its naira currency by 8 percent this week after the central bank admitted dwindling reserves were making it hard to defend it.

In dollar terms the devaluation knocked $40 billion off the value of Nigeria's economy considerably more than the $32 billion worst-case scenario the World Bank projected in October for Ebola's economic impact on the entire sub-Saharan region.

Last week the bank's chief Africa economist said the latest assessments of the epidemic suggested the economic fallout might not be as bad as feared and was likely to be closer to the $3-4 billion end of its projected range.

The same cannot be said for crude-backed African currencies.

Even after the Nigerian devaluation and a 100 basis point hike in interest rates the naira came under more pressure trading at a record low of 178.85 to the dollar.

It opened flat on Thursday around 177.0 a level that is already weaker than the de facto 176.40 lower limit of the central bank's target band revealing skepticism the currency can hold at that level.

In Angola the continent's number two oil producer the kwanza has shed more than 3 percent since September hitting record lows on an almost daily basis amid concerns about the state of government finances.

A year ago Luanda was projecting growth of 8.8 percent with a fiscal deficit of 5 percent of GDP as it poured cash into reconstruction from a long civil war that ended in 2002.

But its spending plans were all predicated on oil which accounts for half of GDP and 90 percent of foreign exchange earnings at $98 a barrel.

The government is budgeting a more sober $81 for next year but even that might be over-optimistic after Brent crude hit a four-year low on Thursday of $76 as ministers from OPEC countries met in Vienna.

Reserves are at a relatively healthy $27 billion enough to prevent a full-scale currency blow-out analysts say but if oil stays below $80 for some time the kwanza will continue to weaken and the budget deficit will balloon.

The result is likely to be sharply reduced spending a big increase in foreign borrowing either through Eurobonds or syndicated loans and possibly even an International Monetary Fund (IMF) bailout as happened after the 2008 financial crisis.

'If there's no support for oil prices the budget deficit could be much larger than 7.6 percent and then you could see an IMF program' said Samantha Singh an African currency strategist at Standard Bank in Johannesburg.

Although they have vast agricultural potential the likes of Nigeria and Angola import nearly all their food and consumer goods which will become more expensive fueling inflation and even raising the prospect of social and political unrest.

Weakening currencies also make imports of machinery more expensive hampering Africa's efforts to capitalize on above average growth rates by building industries to employ the millions of young people entering the labor market each year.

Ghana which became an oil producer in 2011 has already had to go the IMF route to try to stabilize a plunging cedi and pull itself out of a fiscal crisis caused in part by lower-than-expected oil receipts.

Even beyond sub-Saharan Africa's established oil producers which also include Equatorial Guinea Chad Sudan and South Sudan the effects are being felt as frontier exploration projects contemplate shrinking margins.

Britain's Tullow a major regional player told Reuters this month that 'short-term variations' in oil prices would not cast a shadow over projects that may last decades.

Others are less sanguine.

Toronto-listed junior explorer Africa Oil which has interests in Kenya Ethiopia Somalia and Mali said this month its plans in Kenya might be brought into question if the long-term outlook saw prices dropping below $70 a barrel.

At an OPEC meeting in Vienna Iraq's oil minister said crude prices had a floor around $65-$70.

Share prices in the exploration sector suggest concerns are growing.

Africa Oil shares have halved in value since September while London-listed Afren whose main assets are in Nigeria but which also operates in Kenya and Kurdistan have slumped to a five-year low.

Savannah Petroleum whose main hopes are developing a prospect in southeast Niger has also nearly halved in value since it floated in London in August.