Balance Of Payments Hit By Declining Oil Production

BMI View : Declining oil production will cause Chad to run a current account deficit worth 0.8% of GDP in 2013, a deficit which will widen to 7.5% of GDP by 2017. While new discoveries may slow the process, we doubt that enough new production will come online to halt this decline of Chad's oil sector. Weak export growth is the key reason why BMI believes that Chad ' s economy will underperform over the coming years, averaging annual economic growth of just 2.6% between 2013 and 2017.

After a decade of almost unbroken expansion, Chad ' s oil production declined by 4.9% in 2012 as oil fields matured . These figures mark a major turning point for the Central African country's economy. Since BMI forecasts that oil will represent 91.7% of all exports in 201 3 , any fluctuation in oil production will have a major impact on Chad's balance of payments situation. We now predict that Chad's current account surplus will be replaced by a deficit worth -0.8% of GDP in 2013, and that this will widen to a gaping -7.5% of GDP by 2017.

De clining oil production is the key reason why BMI predicts that Chad ' s economy will underperform over the coming years, averaging annual economic growth of just 2.6% between 2013 and 2017 (see 2 November 2012, 'Francophone West Africa To Underperform' on our online service for more information) .

Heading Downhill
Chad - Current Account Components, US$bn (LHS) and Current Account, % GDP (RHS)

Chad's oil-fuelled economic growth is facing geological checks. Declining production at major oil fields and a higher cost of exploring less accessible fields have caused oil exports to fall in 2012, and we predict that they will decline by a further 13.4% in 2013. This is only the beginning; figures from the IMF suggest that Chad's oil exports could be worth 36.4% less in 2017 than in 2011.

In 2012 this decline in exports was offset by the construction of an oil refinery, which cut Chad's fuel imports by 39%. BMI believes that c onstruction of a cement plant and several other industrial projects also boosted exports, keeping the country's current account surplus stable at 3.0% of GDP in 2011 and 2012.

In 2013, however, we predict that imports will increase by 4.4% (the country is dependent on imports for much of its food most consumer goods), while exports will fall by 11.9%. The country has long run a wide service account deficit, and we expect it will develop a trade deficit in 2019.

Easy Come, Easy Go
Chad - Oil And Non-Oil Exports, US$bn

No Exit?

There are two ways that Chad c ould boost exports, by developing new export industries or by boosting flagging petroleum production. The country ' s isolated location, uncompetitive business environment, and poorly-educated workforce would all pose a challenge in developing new industries. We do, however, point to cotton as a potential foreign exchange earner. Boosting food agriculture may also be possible . W e not e that food production nearly doubled in 2011 due to a government policy aiming to improve food security. Any rise in non-oil exports would, however, have to be massive in order to offset declining petroleum production.

While exploration is on going , it is likely that any new finds would slow, rather than halt, Chad's production declines. According to a recent report, Esso - a leading pr oducer - spent US$280mn on production support activities in 2012 in response to maturing wells. Had they not undertaken these projects, the firm estimates that production at its fields would have fallen by 74%. Given higher than expected depletion rates, and an abundance of upstream opportunities in the region, BMI ' s Oil & Gas team believe that Chad's troubled business environment may undermine interest in the country's oil sector in the coming years.

Risks To Outlook

There are t hree key risks to this forecast: political instability, fluctuating oil production, and world price variations. While Chad is currently relatively politically stable, we cannot exclude the risk of armed opposition to President Idriss Déby disrupting the economy (a rebel group almost captured the capital in 2008). While most observers agrees that Chad ' s oil production is likely to decline, we note that oil exploration and geology is inherently speculative and open to readjustment as new information becomes available. Finally, BMI highlights the risk of variations in world oil prices; even at the height of its production the 2009 global financial crisis caused Chad to run a current account deficit as world prices fell.

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

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