BMI View : Guinea's growing current account deficit is a temporary result of large-scale investment into the country's mining sector. Imports of energy and capital g oods will take the deficit to 43.8 % of GDP in 2014 before surging mineral exports bring the account into balance in 2016. Our mining team predicts that the value of Guinea's iron ore production will more than double between 2014 and 2016. Foreign investment should cover the short-fall before then, but we highlight Guinea's exposure to a worse-than-expected slowdown in China.
While Guinea has run a current account deficit every year since 2000, its deficits have recently become increasingly severe, reaching 11.0% of GDP in 2011. While BMI forecasts that this will almost double to 22.3% of GDP in 2012, we hold a positive view of Guinea's long-term balance of payments situation and forecast a current account surplus by 2016.
The reason for this sudden turnaround is Guinea's burgeoning mining sector. Demand for capital and other goods associated with the industry's expansion is currently causing imports (up 42.1% in 2011) to grow significantly faster than exports. Starting in 2014, however, we predict that the completion of new mines will cause exports to grow rapidly. While this positive outlook is highly vulnerable to a worse-than-expected fall in Chinese demand, BMI believes that Guinea's current account situation should steadily improve over the latter half of the decade
|There And Back Again|
|Guinea - Current Account Components (US$bn) & Balance (% Of GDP)|
The trade balance is clearly the dominant force driving Guinea's current account position; the service, income, and current transfers accounts are all re latively small. The country's current account balance began i t s steep de s cent in 2011 when the growing mining sector began to boost demand for the capital and other goods necessary for the industry ' s rapid expansion. We believe that import growth has peaked, however, and will begin to trend downwards after 2012. Even so, the trade account (which was balanced in 2008) will reach - 33.7 % of GDP in 2014.
|Guinea - Mining Production Value (US$bn)|
While import growth is slowing BMI predicts that Guinea's exports are about to surge; we estimate growth of 40.0% in 2014 and 42.0% in 2015. This is entirely due to our bullish view of the country's mining sector. Long the world's leading exporter of bauxite (an ore used in the production of aluminium), Guinea is now developing some of the richest iron ore reserves in Africa.
BMI's Mining team is predicting explosive increases in production as industry giants such as Rio Tinto rush to invest in the country. Due to the small size of Guinea's economy ( BMI estimates the country's GDP to be only US$4.9bn in 2012) the expansion of the iron industry will dramatically boost growth. We forecast real GDP expansion to increase from 5.1% in 2012 to 19.9% in 2015 as new mines come online.
While Guinea will continue to be dependent on imports for fuel, consumer goods, and much of its food, the country's small and impoverished population will keep import demand for domestic consumption small in absolute terms and BMI believes that rapid export growth will keep the country's current account in surplus over the foreseeable future after 2016.
Since the current surge in import demand is being spurred by investments made by foreign mining companies, it is coinciding with a massive jump in foreign direct investment. We therefore believe that the country's balance of payments position will remain stable, despite current account deficits that represent a distressing share of the country's GDP.
The key risk to this outlook is Guinea's dependence on exports to China. The world market for iron ore, like all industrial metals, is largely driven by Chinese demand. As BMI has argued, iron is especially exposed to an economic rebalancing in China since a transition from investment and construction- focused growth to a more consumer-base economic model would likely cause demand for construction materials to fall (see September 14, ' China & Africa: The End Of The Party? ' ) .
Our forecasts for Guinea assume a slowdown in China, but it remains possible that growth in the People's Republic will fall below our expectations, causing iron ore prices to fall dramatically.
|Many Eggs, Few Baskets|
|Guinea - Key Export Partners|
Even so, BMI believes that superior ore grades in West Africa will keep Guinean mines profitable at prices that would pose a serious problem in other regions. Even if some projects are scaled down ( Vale recently decided to refocus on its Brazilian assets) base effects would cause even a more modest production increase to boost the current account. Furthermore, since decreased investor interest would also dampen import demand, we believe that our forecast of an improving current account balance after 2014 is relatively robust in the face of a Chinese demand shock.