Current Account Heading Into The Red
BMI View: Stagnating oil production and heavy dependence on imports will cause the Republic of the Congo (Congo-Brazzaville) to post a deepening current account deficit over the coming years. BMI predicts that the country will just manage to run a current account surplus in 2013 (worth just 0.4% of GDP) before experiencing deficits worth 4.3% of GDP in 2014 and 8.7% of GDP in 2015. Mining exports are set to rise, but are unlikely to fully offset falling oil production. With sufficient investment, Congo-Brazzaville's gas and oil-sands resources could contribute to smaller deficit over the long term.
One of Africa's largest petroleum exporters, the Republic of the Congo (Congo-Brazzaville) faces serious economic challenge as it deals with the effects of stagnating oil production. As oil exports fall ( BMI 's Oil & Gas team forecasts that they w ill decline by 3.15% in US dollar terms in 2013) the country's current account balance will suffer. We predict a current account surplus of just 0.4% of GDP in 2013, followed by a move into deficit from 2014 .
Rising iron ore exports will begin to partially offset this trend beginning in the middle of the decade, but we do not believe that iron will ever fully replace oil as Congo-Brazzaville's key export. While reserves of gas and rich oil-sand potential may eventually boost exports, BMI predicts that the country will run a current account deficit for the foreseeable future.
|A Long Way Down|
|Congo-Brazzaville - Current Account Components (LHS) & Current Account Balance (RHS), % of GDP|
With only 4.3mn people and a small domestic economy, Congo-Brazzaville is highly dependent on exports, which represented 101% of GDP in 2011. We expect this share to decrease as oil exports stagnate (we estimate 90% in 2012 and forecast 83% in 2013) but remain relatively high. The importance of external demand highlights the challenge faced by the Congolese government as oil production at mature wells declines.
Imports are elevated due to both domestic demand (Congo-Brazzaville's largely urban population imports many consumer staples) and the mining sectors, which is growing as investment in iron ore causes an economic boom (see 19 April 'Volatile Growth Trajectory Ahead'). Since this growth is being financed by foreign investment, the growing deficit should be easily covered.
|Best Days Behind Them?|
|Congo-Brazzaville - Oil Production, mn bbl/year (LHS) & Annual Change, % (RHS)|
Rising mining exports will not, however, be sufficient to counteract a structural decline in the oil sector, which we estima te represents 77.4% of exports. While Congo-Brazzaville's high ore grades are attracting investment, global iron prices remain exposed to slowing Chinese growth, and BMI 's Mining team predicts that the country's annual iron ore production is unlikely to exceed US$2bn over the coming years .
A Second Energy Boom?
While oil production is declining due to maturing production at key fields, there is still potential in the Congolese energy sector. Italy's Eni is investing in an oil-sands project in the country's south, which could boost production. Lacking the infrastructure to capture it, Congo-Brazzaville is one of the many African countries to flare most of the natural gas that is released at oil wells. In recent years, two projects have been completed that use Congolese gas that would otherwise be burnt off to generate electricity. If Congo-Brazzaville is able to tap this resource, it could boost flagging hydrocarbon exports and reduce its current account deficit.