The impact oil price hikes could have on African frontier markets

Oil production and consumption varies across Africa, so a higher oil price will affect some economies less than others, says Frank Monkam at Alterior Research.

Commodities markets are back on the investor’s radar. The recent rebound in global economic activity and risk sentiment has lifted demand for energy-related commodities, with oil once again taking centre stage.

On the supply side, geopolitical strains in the Middle East, coupled with shrinking aggregate inventories have been supportive to price action.

Both catalysts have contributed to a sharp climb in oil prices since the beginning of the year, with Brent and WTI rising by more than 20% from their 2011 lows.

Impact of prices

As oil prices reach new highs, ­investors start to worry about the impact of higher oil prices on the global consumer.

Alterior Research has studied the impact of rising oil prices on inflation, fiscal stability and economic growth in African frontier markets.

The analysis covers a select group of economies viewed as proxy representatives of the broader region. They are Angola, Botswana, Ghana, Kenya, Namibia, Nigeria, Tanzania and Zambia.

One key attraction of frontier African markets is the natural diversification they offer, which translates into different reactions to various economic scenarios, including that of soaring oil prices. Oil production and consumption in Africa varies a great deal: Nigeria produces two million bpd, while Zambia a mere 160 bpd.

The global reserve status of the dollar has granted it the right of ­currency denomination in ­commodities markets. At the end of February, Brent crude was about $120, roughly 10% near its record high of $133 seen in June 2008. However, analysis on a local currency basis gives a deeper insight.

From an FX-adjusted perspective, there is some divergence among African countries in the relative increase of crude prices. Notwithstanding the universal rise in crude prices, on a currency-adjusted basis, African economies are experiencing prices that are 16% below their 2008 peak.

This accounts for a relative gain of 6% from aggregate ­currency appreciation. Kenya features the lowest FX-adjusted crude price, with an average monthly Brent price of just $115 (more than 20% below its 2008 peak).

The fundamental question ­concerns the potential effect of a sustained global oil crisis on our frontier African complex. How will that affect current accounts and inflation?

Initial economic conditions, as well as the overall strength and credibility of monetary, fiscal and economic policies are key determinants to these markets’ relative success in navigating though such a crisis.

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