Ailing Oil Industry Leads To Widening Current Account Deficit

BMI View: Lower-than expected oil exports have led us to downgrade our current account forecasts for the Republic of the Congo (Congo-Brazzaville). We now predict a deficit worth 1.7% of GDP in 2013, compared with our previo us forecast of 0.4% surplus . New historical figures have also led us to substantially revise our outlook, a revision which highlights Congo-Brazzaville's weak statistical infrastructure.

BMI 's core view that declining oil production will see Congo-Brazzaville's current account deficit widen over the coming years remains in place, but the sharper-than-anticipated fall in oil exports seen in 2012 has led us to slightly revise our forecasts.

We now anticipate that the country's current account shortfall will widen from 1.7% of GDP in 2013 to 12.4% in 2015, whereas we had previously seen the deficit peaking at 8.7% of GDP in the same year. Our forecast has also been affected by a series of historical data revisions, which underscore the weakness of Congo-Brazzaville's statistical capacity.

Deeper Into The Red
Congo-Brazzaville - Current Account Balance, % of GDP

Congo-Brazzaville's current account position is deteriorating rapidly, and the country has run a current account deficit since 2007. While this is not uncommon for African states, it is notable considering that Congo-Brazzaville is a major oil producer.

New figures from the African Development Bank (AfDB) indicate that goods exports grew by just 3.8% in 2012, while imports surged by 14.7%. Import growth has exceeded export growth in four of the past five years, whittling down the country's trade surplus. While the trade surplus remains relatively wide (we forecast 29.0% of GDP in 2013), deep deficits in the service and income accounts pull the current account into the red.

Over the coming years, BMI believes that this trend of weak export growth will continue (we forecast a 1.5% fall in export values in 2013) and that the current account will further deteriorate. We predict a deficit in every year until 2021, though anticipate that the shortfall will peak in 2015 before narrowing towards the end of the decade due to rising iron ore exports .

Exports Stagnating
Congo-Brazzaville - Exports, % of GDP (LHS) & Oil Exports Annual Change, % (RHS)

The key reason for this weak export outlook is the fact that Congo-Brazzaville is highly dependent on an oil sector which is seeing rising costs and stagnating production. BMI 's Oil & Gas team forecast that oil exports began to decline in 2012, and will have dropped by almost a fifth by 2017. A sharper-than-expected fall in production in 2012 is a major reason for our forecast revision.

Fortunately, however, Congo's non-oil exports are set to rise significantly as the country develops its rich iron ore potential. Investment is rising substantially, and we expect an economic boom on the back of increasing fixed capital construction and rising iron ore exports (see ' Volatile Growth Trajectory Ahead ', May 19) . We predict that the growth of iron ore exports will arrest the nominal decline in Congolese exports, but also boost goods imports, blunting the industry's effect on Congo-Brazzaville's current account position .

It does remain possible, however, that new oil exploration could give the country's energy industry a second wind , and this represents the key upside risk to our forecast. Congo-Brazzaville's oil sands potential could allow the country to boost production by tapping non-traditional deposits. Despite the threat of stagnating production, the investment in the sector has continued (see 'QPI Rises In Africa As LNG Outlook Sunsets', 23 May) .

Unreliable Figures
Cong-Brazzaville - Previous & Updated Current Account Figures, US$bn (LHS), Revision, % of GDP (RHS)

Beyond falling oil exports, BMI has been forced to update our forecasts in light of data revisions from the African Development Bank (AfDB). Indeed, we note that we have made more extensive changes to our historical figures than to our future projections.

The bank's latest statistical outlook reduced Congo-Brazzaville's 2011 export figure by US3.8bn, a figure equivalent to 30.9% of GDP. This caused a substantial change to our 2011 historical data, and eliminated the current account surplus which we had recorded for that year. The effect would have been even more significant had the AfDB not also narrowed their figures for Congo-Brazzaville's service and income deficit .

These data revisions highlight the changeable nature of Congolese government statistics, and highlight the risks posed to our forecasts by further changes to our historical figures.

This article is tagged to:
Sector: Country Risk, Oil & Gas, Mining
Geography: Congo

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