Running On Fumes

BMI View: The combination of stagnating oil production and faltering public investment spending has sent Equatorial Guinea's economy into a crisis, and we expect the country's GDP to contract by 1.9% in 2013 and 0.4% in 2014. The discovery of new oil fields could provide an upside risk to this forecast, but we doubt that an economic diversification drive of the sort underway in neighbouring Gabon is likely to succeed give n Equatorial Guinea's small population and appalling business environment.

Equatorial Guinea's economy expanded by a factor of 7.1 in US dollar terms between 2000 and 2012 as oil production turned the sleepy backwater into one of Africa's top energy exporters. With just 757,000 people, the country has become the richest per head in Africa. Billions of US dollars in oil revenue have entrenched President Teodoro Obiang Nguema Mbasogo and discouraged economic reforms.

Oil prod uction, however, peaked in 2005 and a sharp fall in energy prices in 2009 battered the economy. Government stimulus programs (which included building a new capital city in the middle of an inaccessible jungle) have had a limited effect. Unless oil production can be increased or new export industries developed, BMI predicts that Equatorial Guinea's economy faces a structural decline over the coming years.

Crashing Out
Africa - Real GDP Growth, %

BMI View: The combination of stagnating oil production and faltering public investment spending has sent Equatorial Guinea's economy into a crisis, and we expect the country's GDP to contract by 1.9% in 2013 and 0.4% in 2014. The discovery of new oil fields could provide an upside risk to this forecast, but we doubt that an economic diversification drive of the sort underway in neighbouring Gabon is likely to succeed give n Equatorial Guinea's small population and appalling business environment.

Equatorial Guinea's economy expanded by a factor of 7.1 in US dollar terms between 2000 and 2012 as oil production turned the sleepy backwater into one of Africa's top energy exporters. With just 757,000 people, the country has become the richest per head in Africa. Billions of US dollars in oil revenue have entrenched President Teodoro Obiang Nguema Mbasogo and discouraged economic reforms.

Oil prod uction, however, peaked in 2005 and a sharp fall in energy prices in 2009 battered the economy. Government stimulus programs (which included building a new capital city in the middle of an inaccessible jungle) have had a limited effect. Unless oil production can be increased or new export industries developed, BMI predicts that Equatorial Guinea's economy faces a structural decline over the coming years.

Crashing Out
Africa - Real GDP Growth, %

BMI predicts that Equatorial Guinea's economy will experience negative real growth over most of our 2013 to 2017 forecast period and that GDP will be 2.9% smaller in inflation-adjusted terms in 2017 than it is today. The country's economic prospects are bleaker even than its peers in the Communauté Économique et Monétaire de l'Afrique Centrale (CEMAC), a bloc which BMI predicts will significantly underperform most African economies over the coming years. We forecast that only the war-torn Central African Republic (CAR) will experience a sharper economic contraction in 2013, and that Equatorial Guinea will be Africa's worst-performing economy in 2014.

Bottom Of The Barrel
Sub-Saharan Africa - Worst Performing Economies (Real GDP Growth)

There are three key reasons for Equatorial Guinea's sharp economic deceleration; the withdrawal of government stimulus measures, stagnating oil production, and a poor business environment which is deterring foreign investment.

The Limit To Stimulus

President Obiang's response to stagnating oil production has been to launch an ambitious investment programme in an attempt to stimulate the economy. Capital projects represent more than 80% of government spending and investment expenditure makes up 53.9% of GDP, a figure which is among the highest in the world. BMI expects this figure to decline, however, as the government trims its investment programme in line with falling oil revenues (see ' Faltering Oil Production Weighing On Fiscal Balance', February 12).

The completion of several major projects, notably stadia for the 2012 African Cup of Nations football championships, will also see spending reduced. We note that government spending on prestige projects (such as a new capital and a 'Central African University') have had a minimal impact on productivity and that a dependence on foreign contractors for capital goods, building materials, and labour has reduced their stimulus effect.

Economic Foundation Weakening

The most important cause of Equatorial Guinea's economic decline is faltering oil production. Oil and gas shipments contribute 98.2% of export earnings and the oil sector makes up just less than 90% of GDP. As production falls, tax revenue and export earnings will be hard hit. Equatorial Guinea's dependence on imported food, consumer goods, and refined oil products means that the country's import demand is relatively inelastic. BMI predicts that high import demand will steadily erode the country's trade surplus, widening the current account deficit and imposing a significant drag on headline growth.

Over The Hill
Equatorial Guinea - Oil Production, 000 Of Barrels per Day (LHS) & Annual Change, % (RHS)

New discoveries could slow the decline of oil production, but BMI 's Oil & Gas team stresses that any new fields would have to be significant in order to offset falls at existing wells. Given that it would take several years move from discovery to commercial production, there is little upside risk to our 2014 and 2015 forecasts.

Little To Fall Back On

The economic impact of lower oil production will be more damaging in Equatorial than in neighbouring Gabon (which is also seeing output fall) due to the country's complete failure to diversify its economy or establish alternate export industries. Equatorial Guinea has one of the worst business e nvironments in Africa, with President Obiang 's government widely accused of corruption and financial mismanagement.

The country's small population and lack of natural resources would present significant obstacles to economic diversification in any case, but a business environment that deters foreign investment and strangles domestic businesses in red tape will impede the rise of alternate industries. Unless Equatorial Guinea's government makes significant political and economic reforms, BMI predicts that the country's economy will decline over the duration of our 2013 to 2022 forecast period.

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This article is tagged to:
Sector: Country Risk
Geography: Equatorial Guinea, Equatorial Guinea, Equatorial Guinea, Equatorial Guinea
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