Fiscal Balance Deteriorating As Oil Production Stagnates


BMI View : While the decline in the Republic of the Congo's 2012 fiscal balance was due to one-off shocks (disaster recovery and a government infrastructure plan) we believe that the country's finances are in a structural decline. With oil production declining, we believe that the Republic will soon run a structural deficit. The growth of the mining industry will slow, but not prevent, this trend.

As oil production in the Republic of the Congo declines, BMI predicts that the country ' s fiscal balance will steadily slide. Rents from the petroleum sector made up an estimated 80.4% of total government income in 2012, and we do not believe that even robust growth in the non-oil sector will be able to offset a decline in this key source of the government's income . After running a fiscal surplus worth 18.9% of GDP in 2011, we predict that the republic will post a deficit equivalent to 2.8% of GDP by 2017.

While the dramatic decline in Congo's fiscal balance in 2012 was largely caused by emergency spending that followed a March 4 explosion at a military base in Brazzaville that killed hundreds and caused devastation across much of the capital, we stress that structural forces are at work in the oil-dependent country. Though we expect the government's fiscal balance to improve in 2013 (rising from 1.0% to 5.2% of GDP) BMI believes that the long term trajectory remains negative.

Leaner Times Ahead
Congo - Basic Fiscal Balance & Non-Oil Balance (% GDP)

Unlike many of its neighbours, the Republic of the Congo has historically had a strong fiscal position. Persistent government surpluses however, have been based almost entirely on the country ' s oil and gas sector. If we exclude petroleum rents, the country would have run a fiscal deficit worth over 15% of GDP each year since 2008. This is unsurprising given the prominent role that the oil sector plays in Congo's economy; petroleum products make up 85% of exports and the non-oil economy remains underdeveloped.

The End Of The Easy Money

On The Way Down
Congo - Oil Production (Barels/Day) & Revenue (XAF bn)

It is also unfortunate given that analysis from BMI's Oil & Gas team suggests that Congo's oil production peaked at 112,900 barrels per day in 2012. We predict that the country's crude production will fall by approximately 1.0% annually over the coming years as oil fields mature and are slowly exhausted. Exploration for new energy sources poses an upside risk to this forecast, but we doubt that any new discoveries will totally offset declining production in the country's key fields. Even if large new discoveries were made, it would be years before they began large-scale production.

Combined with our view of moderate oil prices, this forecast leads BMI to predict that government revenue from the oil sector will be 16.8% lower in 2017 than it was in 2012. This will pose a serious revenue challenge to the Congo's government, and is the key reason for our negative outlook for the country's fiscal position.

The Republic of the Congo's non-oil e conomy is both small and poorly regulated. Much of the country's labour force works in the informal economy, hampering the government's attempts to raise revenue from other sectors. While BMI predicts that private consumption will increase by 6.3% in 2013, we do not believe that this will have an appreciable effect on government revenues.

One Leg To Stand On
Congo - Government Revenue By Source (XAF bn)

Over the longer term, however, BMI believes that the country ' s non-oil natural resources will attract investment and boost government revenues, though not by enough to prevent a slowly widening fiscal deficit. While the Republic receives a weak score on BMI ' s proprietary business environment ratings (28.9/100) due to corrupt institutions and weak infrastructure, we believe that its comparative political stability will prove an attractive quality . After a civil war in the 1990s, the country has enjoyed a stable political and security situation.

Light At The End Of The Tunnel?
Africa - Congo & Sub-Saharan Africa Real GDP Growth (%)

We expect investment in the country ' s mining sector - much of it Chinese-led - to increase exports by 23.0% in real terms when production comes online in 2015. This will contribute to a one-time acceleration of growth to 15.0% in that year and to contribute to higher government revenues and higher economic expansion in the years to come.

Even so, BMI believes that this will only slow, but not stop, the country ' s fiscal decline. Even by the end of our forecast period, in 2017, oil rents will still make up 64.4% of government income and the steady decline in this vital source of funds will squeeze revenues over the long term.

Risks To Outlook

As mentioned above, new discoveries leading to higher oil production forecasts would cause us to significantly readjust this outlook. It is also possible that faster-than-anticipated growth in the non-oil economy or a dramatic improvement in the government ' s tax collection systems could boost government revenues beyond our current forecast. While we believe that Congo ' s political stability is a strength, we note that the country's political system is highly centralised and dependent on President Denis Sassou Nguesso , who will turn 70 in November 2013. The eventual end of President Sassou Nguesso's rule presents serious political risks to our forecast .

This article is tagged to:
Sector: Country Risk, Mining, Oil & Gas
Geography: Congo, Congo, Congo, Congo

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