As the crash in the crude oil price this week has deepened the sell-off in financial markets on the back of the coronavirus, so we are being treated to memorable quotes and alarmist forecasts in the media. One of our favourites is the catchy “$20 in 2020”. As for the forecasts, some household names in global investment banking are providing good copy with headlines we will rapidly forget until we see very different projections from the same source in the days/weeks to come.

We struggle to identify any gainers from the coronavirus although there are winners and losers in Africa, as elsewhere, from a dollar oil price in the mid-thirties. Where the fuel price is market-determined or is adjusted monthly according to an independent mechanism, as in South Africa and Kenya, motorists are seeing the benefit.

The position may be different in small, oil-importing economies, where the government has a very narrow tax base. Personal taxpayers are few, and import levies and fuel taxes are critical. The government may not wish/be able to share the benefit of the lower crude price.

The losers from the current double-whammy are more visible. Oil exporters with managed exchange rates and non-diversified economies probably head the list. Angola and Nigeria spring to mind: their official reserves decline with the oil price and, in Nigeria’s case, the exit of some portfolio investors as well. Angola went to the Eurobond market in Q4 2019 when investors were not very picky about the credit story as long as the yield was attractive.

How Nigeria must wish that it had tapped the market at the same time, and raised billions! It did not, for what was then a good reason. The federal government had managed to harmonise the budget and calendar years with the 2020 budget, and instructed the finance ministry to push its external borrowing programme for 2019 into the new year. Now the ministry has to rework its 2020 budget in view of the oil price fall.

Tourism industries are also obvious losers. Where the flights are still available, the fares have been slashed by the carriers. However, the stay-at-home mindset prevails among would-be tourists. South Africa, Kenya, Egypt and Morocco are among the vulnerable holiday destinations.

We should also watch out for the pressures on airlines. Some African carriers will be saved at huge cost for the national prestige. How could South Africa not have its own state airline, some might ask?  Ethiopian Airlines was even profitable during the Derg, and has recently expanded its network as well as the hub status of Addis. Not too rapidly, we trust.

In our search for winners, we float the possibility that some Western multinationals will be tempted to embark on restructuring/relocation of labour under the camouflage of the coronavirus. If we are talking outsourcing, then some African economies could benefit alongside India. If we are talking new factories to replace plants in the West and China, they could also gain if they can offer power supplies, a sound regulatory system and good governance.

While nobody can plausibly offer a timeline for the start of life without coronavirus, we can share our hunch on the oil price. Saudi and Russia would like us to believe that they can ‘tough it out’ longer than the other. Sizeable fx reserves and amenable voters underpin such a stance. However, both have development plans for the infrastructure and both know that voters, although seemingly pliable, can protest. We should therefore not get carried away, for example, by macho talk from Moscow that Russia could live with crude at US$30/b for a decade, or by the news from Riyadh that the Saudi government has ordered Aramco to prepare for national production of 13.0mbpd (compared with 9.7mbpd as recently as last Friday, when the OPEC+ talks collapsed).

Both Saudi and Russia hope to damage the US shale oil industry in this price war. The strategy did not work last time around (2014), and the remorseless rise of the industry’s output continued. The plan could now work since many shale producers (other than the majors) are heavily indebted, have issued junk bonds and struggle to make the profits to persuade the banks to refinance. It should be clear that we have not bought into the US$20 for 2020 story.

13 March 2020.

Jean Puri