Oil slump puts African states on devaluation hook

Africa’s top crude producers just got a sneak preview of a world that doesn’t want their oil, and it ain’t pretty. The recent plunge to $36 a barrel trashes the budgets of Nigeria and Angola and puts their currencies against the ropes. Devaluations look inevitable. Better to get them over with quickly and save valuable reserves for the painful switch to a greener, low-carbon future.
Barring a sudden price-war ceasefire between Saudi Arabia and Russia, both countries are in trouble. Nigeria’s budget is based on crude at $57 a barrel. Angola’s is only marginally better at $55. With hydrocarbons accounting for two-thirds of government revenue, that means massive decreases in public spending or massive increases in borrowing.
On the borrowing front, Nigeria’s $500 billion economy has some leeway. With debt at 30 per cent of GDP, of which just 15 per cent is in dollars, Africa’s most populous nation can continue to tap domestic and foreign investors. Angola lacks this luxury, with no domestic capital markets and debt at 90 per cent of GDP, according to the International Monetary Fund.
Opaque oil-for-infrastructure deals with Beijing make its true borrowings hard to gauge.
The oil rout also puts pressure on both countries’ currencies, which are tied to the dollar. Oil accounts for 90 per cent-plus of exports and, with fewer dollars coming in, central banks will be forced to spend reserves to defend the currency. Angola’s savings are relatively stable after a swingeing 66 per cent kwanza devaluation two years ago.
But Nigeria’s have fallen to $35.5 billion from $43 billion a year ago, enough to cover just seven months of imports. Even before the oil price slump, reserves were set to fall within a year to a level that triggered a 35 per cent naira devaluation in 2015.
President Muhammadu Buhari, a former military dictator and fan of strong currencies, may try to ride out the storm.
That would be a waste of money. In the near future, Nigeria faces a far greater threat from climate change. But unlike Angola, it has a vibrant non-oil economy – last year, services made up half of GDP. With some nurturing from a weaker currency, that could grow fast. And Abuja’s low external debt makes a devaluation manageable. For Nigeria, at least, the long-term gains should outweigh the short-term pains. — Reuters