Mining Boom Cushions Fiscal Crisis

An iron ore boom is causing growth to pick up in the Republic of the Congo, an oil-dependent economy facing declining energy production. New sources of fiscal revenue will m itigate the impact that declining oil rents will have on the country's finances. Even so, we predict that Congo- Brazzaville's fiscal surplus will decline from 17.9% of GDP in 2011 to just 1.4% in 2017.

On March 4, 2012 a government arms depot exploded in Brazzaville, killing some 200 people and making over 13,000 locals homeless. Recovering from the disaster was costly for the Congolese government, with reconstruction and compensation payouts causing current expenditure to increase by 27.5%. The country's fiscal surplus fell to 2.4% of GDP in 2012, from 17.9% a year earlier.

While BMI expects the country's fiscal health to improve in 2013, we stress that declining oil production will steadily degrades the fiscal balance. Mining sector growth will moderate this trend, but will not reverse it. We predict that the republic's fiscal surplus will fall to just 1.4% of GDP by 2017.

A Gentler Decline
Congo-Brazzaville - Fiscal Surplus, % of GDP

Mining Boom Cushions Fiscal Crisis

An iron ore boom is causing growth to pick up in the Republic of the Congo, an oil-dependent economy facing declining energy production. New sources of fiscal revenue will m itigate the impact that declining oil rents will have on the country's finances. Even so, we predict that Congo- Brazzaville's fiscal surplus will decline from 17.9% of GDP in 2011 to just 1.4% in 2017.

On March 4, 2012 a government arms depot exploded in Brazzaville, killing some 200 people and making over 13,000 locals homeless. Recovering from the disaster was costly for the Congolese government, with reconstruction and compensation payouts causing current expenditure to increase by 27.5%. The country's fiscal surplus fell to 2.4% of GDP in 2012, from 17.9% a year earlier.

While BMI expects the country's fiscal health to improve in 2013, we stress that declining oil production will steadily degrades the fiscal balance. Mining sector growth will moderate this trend, but will not reverse it. We predict that the republic's fiscal surplus will fall to just 1.4% of GDP by 2017.

A Gentler Decline
Congo-Brazzaville - Fiscal Surplus, % of GDP

Despite this down beat view, BMI has moderately upgraded our fiscal forecasts for the Republic of the Congo (referred to as Congo-Brazzaville after its riverside capital) since our last outlook. Despite weaker commodity prices, our mining team retains the view that investment into the country's iron ore resources will continue. The expectation of faster non-oil growth has led BMI to identify Congo-Brazzaville as an outperformer in its sub-region, and we believe that this will support continued revenue growth (see ' Set For CEMAC Outperformance ' July 29).

The End Of The Oil Party?

Even so, lower oil production will weigh on the country's economy and significantly weaken the fiscal balance. While budget information for Congo-Brazzaville is frequently imprecise, data from the IMF suggests that oil rents make up around 80% of government revenues. Like other Central African states, Congo-Brazzaville faces the challenge of reducing its economic reliance on the industry that made it one of Africa's richest countries.

Slowing Down
Congo-Brazzaville - Value of Oil Production, US$bn (LHS) & Average Brent price, US$ (RHS)

BMI 's Oil & Gas team predicts that the value of Congo-Brazzaville's oil production will decline from US$11.7bn in 2012 to just US$9.6bn in 2017, a 17.9% fall. This forecast is based on both BMI 's prediction that oil prices will trend downwards over the coming years as well as our view that production peaked in 2010 and has since fallen due to maturing oil wells and depleting reserves.

Of major African oil exporters, Congo-Brazzaville has one of the lowest reserves to production ratios. If the country's oil reserves are exploited at the current rate, they will be entirely depleted in just 14 years. It would take Gabon 22 years to use its currently mapped reserves, while Nigeria has over 40 years of oil remaining.

It remains possible, of course , that new oil discoveries will boost production and delay the decline of the industry. Investment in offshore exploration and oil-sand development is ongoing (see 'QPI Rises In Africa As LNG Outlook Sunsets', 23 May) . BMI stresses, however, that any new discovery would have to be on a very large scale to fully offset the production declines forecast for Congo-Brazzaville's currently active oilfields.

Another Leg To Stand On
Congo-Brazzaville - Exports, US$bn

Fortunately for Congo-Brazzaville, however, the expansion of the country's mining sector will provide a new source of fiscal support. We predict that the opening of major iron ore mines in 2015 will provide a new source of exports, boosting government revenue. Even so, BMI does not believe that the iron ore sector will fully offset the fall in oil rents.

Weak administrative capacity, poor policy enforcement, and a tax system designed to encourage inward investment will limit the impact of mining growth on the fiscal balance. We predict that government revenues will rise in 2015, but do not anticipate a structural change in the state income. BMI forecasts that Government revenues as a share of GDP will continue to decline over the duration of our forecast period .

Among The Highest-Spending
Africa - Capital Expenditure, % of Government Expenditure

Beyond faltering revenue, another key reason why BMI predicts that Congo-Brazzaville's fiscal balance will deteriorate is due to the country's ambitious infrastructure plans. President Denis Sassou-Nguesso has dedicated significant resources to improving Congo-Brazzaville's transport and communications infrastructure. Some of this investment is necessary for the expansion of the mining sector, while other projects aim to boost economic diversification in other ways.

High spending is also seen as a mechanism of maintaining social stability and popular support for Preside nt Sassou-Nguesso's government, meaning that it is unlikely to be reduced even as revenues falter. The coun try's budget allocation is poor and Transparency International reports that corruption remains a serious problem, leading BMI to believe that much of Congo-Brazzaville's investment expenditure is likely wasted.

CONGO-BRAZZAVILLE - FISCAL POLICY
2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Notes: e BMI estimates. f BMI forecasts. Sources: 1 AfDB/BMI.
Fiscal revenue, XAFbn 1 1,335.0 2,231.0 2,894.0 3,162.8 3,520.2 3,906.9 4,606.2 4,975.8 5,522.5
Revenue, % of GDP 1 34.5 41.8 46.3 44.3 44.5 45.7 42.8 42.9 43.1
Fiscal expenditure, XAFbn 1 1,118.4 1,275.0 1,776.0 2,990.1 2,955.8 3,418.5 4,066.0 4,686.3 5,341.6
Expenditure, % of GDP 1 28.9 23.9 28.4 41.9 37.4 40.0 37.8 40.4 41.6
Current expenditure, XAFbn 1 627.4 680.0 692.0 882.1 714.2 829.9 1,047.5 1,188.5 1,349.2
Current expenditure, % of total expenditure 1 56.1 53.3 39.0 29.5 24.2 24.3 25.8 25.4 25.3
Current expenditure, % of GDP 1 16.2 12.7 11.1 12.4 9.0 9.7 9.7 10.2 10.5
Capital expenditure, XAFbn 1 490.0 595.0 1,084.0 1,908.0 2,041.6 2,388.6 2,818.6 3,297.7 3,792.4
Capital expenditure, % of total expenditure 1 43.8 46.7 61.0 63.8 69.1 69.9 69.3 70.4 71.0
Capital expenditure, % of GDP 1 12.7 11.1 17.4 26.7 25.8 27.9 26.2 28.4 29.6
Budget balance, XAFbn 1 216.6 956.0 1,118.0 172.7 564.4 488.4 540.2 289.5 180.9
Budget balance, % of GDP 1 5.6 17.9 17.9 2.4 7.1 5.7 5.0 2.5 1.4
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.

×

REQUEST A DEMO

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.

Thank you for your interest

A member of the team will be in touch shortly to arrange a convenient time for your free demonstration and trial. If your enquiry is urgent, please email our Client Services team here.