2011: Oil will lead economic growth in Africa

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For better or for worse…

It’s January 1st and it seems fitting to post this piece from the “beyond brics” blog at the Financial Times.

What slowdown? Oil to drive growth
December 17, 2010 10:42 am by Henry Mance

For the global economy, Christmas parties came early this year: stimulus spending boosted growth to possibly unsustainable rates. Next year, a mild hangover is likely to kick in – with slower growth in much of the world, including China, India and Brazil.

Yet, for those in need of some more festive cheer, there are three regions that are forecast to see faster growth in 2011: the Middle East and North Africa, sub-Saharan Africa, and Russia and central Asia. All three will average at least 4.6 per cent growth, according to the IMF, overtaking Latin America as the world’s most dynamic regions after Developing Asia. Why are they accelerating? The common thread is oil.

The greatest upturn in growth comes from the Middle East and North Africa, where the IMF predicts growth will rise from 4.1 per cent this year to 5.1 per cent in 2011, as oil prices remain high and stimulus spending continues in some less-indebted states, such as Saudi Arabia. “Oil-importing economies in the region also benefit [from the higher oil price] (roughly one-fourth of their exports go to oil exporters),” the IMF said in its latest Economic Outlook.

In sub-Saharan Africa, the IMF predicts growth will be 5.5 per cent in 2011, compared to 5 per cent this year, “supported not only by the recovery in exports and commodity prices, but also by robust domestic demand in a number of economies.” Nigeria is evidence of both trends – although the IMF also points out the economic benefit of reduced instability in the Niger Delta.

Then there’s Russia and central Asia (the Commonwealth of Independent States) – where the IMF predicts growth will edge up from 4.3 per cent to 4.6 per cent next year. Higher oil and gas prices are again crucial. But local factors are also influential: Russia will grow faster without this year’s drought and wildfires, and with greater bank lending (“the adjustment of bank balance sheets appears to have run its course,” the IMF said). A new customs union with Belarus and Kazakhstan may also help trade. Growth will accelerate in the Ukraine, which has sorted out its banking system, but will slow in Kazakhstan, which has not.

Significantly, the IMF’s forecasts were made over a month ago. They assumed the average price of oil would be $78.75 a barrel in 2011, based on the then futures prices; futures for December 2011 are now around $92. Some, like Royal Bank of Canada, think the oil price will be around $90; others like Capital Economics think it will collapse towards $60. But the consensus seems to be shifting upwards: the Russian economy ministry this week raised its 2011forecast for the price of Urals crude (a little cheaper than Brent crude) from $75 to $81 a barrel.

Higher prices would provide a tailwind for growth in oil exporters – postponing the need for austerity in Russia and elsewhere. However, it is no substitute for economic modernisation. Capital Economics’ Neil Shearing says that, so long as Russia doesn’t reform, a higher oil price will simply “paper over the cracks”, adding that investors are more likely to turn to the Middle East, Latin America and elsewhere.

What’s more, as the FT’s commodities editor has noted, the actual oil price is only half the story: the commodity is denominated in dollars, so exporters benefit (and importers generally suffer) in relation to the strength of their currency. Exporters with very strong currencies, like Brazil, win less than those with weak currencies, including Russia.

Finally, if oil prices get too high, global growth will brake sharply – and the party will truly be over.

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