Re-governance of SWFs in Africa: Dilemma of oil-based economies

Oil and gas economics has changed. In Africa’s hydrocarbon-dependent economies, petroleum frequently accounts for 80-90 percent of government revenues (Angola 80 percent, Libya 90 percent, Nigeria 80 percent); which makes them very susceptible to the risks of boom-bust cycles in oil prices. These states normally use stabilization Sovereign Wealth Funds (SWFs), accumulated from oil sales, to smooth state budgets and reduce the fiscal shocks arising from price volatility.

Years of fairly stable and high oil prices, as well as boom periods that lasts longer than the bust periods have seen SWFs grow; stimulating many ambitious, long term infrastructural projects in some countries. However, the current, continued fall in oil prices is a consequence of novel (permanent according to some analyst) shifts in the global demand, supply dynamics of crude oil.

Considering the impacts of US shale production and genuine concerns that prices may never return to the $100 per barrel region again; these African economies will have a need/duty to re-govern sovereign funds. Given the near-permanent erosion of excess earnings from the principal commodity (Oil) through which they are usually accumulated, the reserves will continue on the downward path already witnessed since July 2014.

In the sidelines of this year’s World Economic forum in Davos, Bob Dudley, BP’s boss mentioned that they (at BP) were already planning on low oil prices for years to come. “We have to plan on this (price) being down, but we don’t know exactly what level, but certainly a year, I think or maybe probably two or three” he told the BBC, affirming, the potential for prices to stay low in the medium to long term.

Furthermore, the characteristic weak institutions of governance and non-transparent trades in these economies often encourage executive profligacy and opaque fund management practices. Unless SWFs are re-invented to reflect the recent, strategic market changes; domestic fiscal stability and numerous infrastructural projects may be dragged down with it.

Early signs are already emerging, as nations like Angola has not seen its SWF grow since June last year. Nigeria’s SWF, the governance of which is shrouded in what observer has pointed out to be excessive executive control may be currently functioning to supplement the budget but how long? In Nigeria’s oil and gas industry which has suffered enormously due to the non-passage of a Bill called the Petroleum Industry Bill (PIB); activities are gradually waning.

Some projects that were financed on above $100 per barrel price estimates are now stranded. Owners will have to battle with unfriendly financial institutions for fiscal deal restructuring. The cushion effects of SWFs will save Nigerian’s budget from the anticipated shock, but that will be for a limited time.

The real challenge will be seen in the region of the curve were SWFs has been significantly depleted and oil prices remain low. In a diversified economy this would pose less grave threats, as earnings from other sectors could be quickly deployed to play a similar role. Furthermore, to develop an alternative will take many years with austerity measures targeted at the masses.

In Angola, the Fundo Soberano de Angola, managed by president Dos Santos’ son, Jose Filomeno Dos Santos, had already made plans of very ambitious portfolios in 2015, before prices began to crash. $1.6 billion has been set aside to back projects which include an Africa wide investment in hospitality, as well as, other infrastructural development project.

These may go on, but certainly not at the speed at which they were earlier projected. Even in non-hydrocarbon economies, the impact of falling crude price is being felt due to its relational effects on commodities such as gold and cereals, further putting an organic strain on other sectors of the economy.

While SWFs can be said to be currently serving the very purpose for which it was created/accumulated in affected countries; sustainability is clearly threatened by current event in the global crude oil market.

CHIJIOKE K. MAMA

Chijoke K. Mama is a senior oil and gas Analyst; chijioke.mama@yahoo.com; twitter @chijiokemama