BLACK #STORIES::::Cheap oil; Who are the winners and losers in Africa?

The recent free fall in oil prices is creating winners and losers across the globe, and Africa is no exception. Some of the consequences of cheap oil seem obvious: the oil exporting economies in Africa will take a hit, while the importers will rejoice.

However, the extent to which the pain and the gains will be felt is less immediately clear. This will depend on various factors, including the degree of oil dependency and the size of fiscal buffers in different African countries. Moreover, there may be some offsetting benefits even for the oil producers.

Nigeria, Angola, Gabon, Equatorial Guinea, Cameroon, and the Republic of Congo (Brazzaville) are among the most oil dependent countries in sub-Saharan Africa. Although gradual economic diversification in most of these countries has seen oil’s share of GDP slowly decline in recent years, it remains the single biggest industry for all of them.

Oil remains even more important for these countries as a source of export receipts and government revenue. In the case of Africa’s two biggest oil producers, Nigeria and Angola, the commodity typically accounts for at least three quarters of both exports and fiscal receipts.

Unsurprisingly, then, the collapse in the price of a barrel of oil from over $100 in the middle of 2014 to below $50 today is bad news for the big oil exporting economies. As well as causing a loss of government revenue in the short term, lower prices may cool investors’ enthusiasm for committing capital to the oil sector in the medium-to-long term. This could pull down future economic growth rates.

This is particularly true for those African countries where production costs are high. For example, some investors estimate that the deep offshore exploration blocks of Angola, Gabon and the Congo (Brazzaville) would be profitable to develop only if oil prices average over $70 a barrel for the lifetime of the wells - significantly above current prices.

The plunge in oil prices already seems to have rattled bond investors, as indicated by the recent sharp spike in yields on paper issued by oil-dependent African sovereigns, which until just a few months ago were borrowing at record low interest rates. That said, yields have also risen on Eurobonds issued from African countries that are not major oil producers, albeit not quite to the same degree in most cases.

This could suggest that bond investors still treat African debt as a homogeneous category to some degree, or that other factors are in play, such as US monetary policy normalisation or worries about the outlook for other commodities. Whatever the reasons, it seems that governments of oil-producing countries in Africa will find borrowing more costly right at the moment their revenues are also under pressure.

Despite this gloomy outlook, cheap oil may have a few silver linings even for oil producers in the region. Government expenditure on subsidising oil products like petrol and diesel is one example. Although Nigeria has managed to cut its spending on fuel subsidies since 2012, when they were equivalent to nearly 4 percent of GDP, they were nonetheless estimated at a still-hefty 1.5 percent of GDP in 2014.

Fuel subsidies also consume hundreds of millions of dollars of public money every year in Cameroon and other oil-producing countries. As market prices of fuel products drop in line with those of the crude oil from which they are derived, the fiscal burden of subsidising them should also lessen.

Similarly, many countries in Africa are investing heavily to boost energy provision. Sharply lower costs for electricity generation inputs like fuel oil could free up budgets for other priorities, such as improving and extending electricity distribution networks.

Net oil importers will, of course, reap the biggest gains from cheaper oil. Energy products account for around a quarter of imports to Morocco and around a fifth of those to South Africa, for example. The steep fall in oil prices should be a boon for their trade balances. However it is not all good news for oil importers, as many of them export commodities whose prices have also dropped.

Prices for South Africa’s main commodity exports including platinum, gold, diamonds and iron have all softened over the past year. The same is true of phosphates, Morocco’s main commodity export, and copper, which is the principal export of both Zambia and the Democratic Republic of Congo. As a result of these shifts, the overall change in the terms of trade of Africa’s net oil importers may not be quite as positive as the dramatic drop in oil prices suggest at first glance.

Commodity prices - and particularly those for oil - are notoriously difficult to predict. Whether recent lows reflect a structural shift in these markets, a short-lived irregularity, or a period of increased volatility, remains to be seen. Whatever the longer term outlook, the recent slump in prices of oil - and to a lesser extent other commodities too - highlights the risks faced by the many African economies that rely heavily on pumping or digging up raw commodities for export.

Patrick Raleigh is associate director of sovereign ratings at Standard & Poor’s.