Economy’s prospects hang on oil price fall

The economy’s bright prospects, largely anchored in the expectation of an expansion in the oil sector, appears to be in jeopardy as crude oil prices continue their downward trend, the Institute of Fiscal Studies (IFS) has warned.

Executive Director of the economic think-tank, Professor Newman Kusi, told B&FT that the persistent fall in price of black gold could act as a disincentive to oil exploratory activities — and to some extent ongoing works such as the Tweneboa, Enyerra and Ntomme (TEN) oilfields.

The country’s GDP growth is expected to move from 5.4 percent next year to 9.9 percent in 2017, and then to 9.3 percent in 2018.

The massive leap in the GDP performance the Finance Minister has attributed to the coming on-stream of new oil projects. Presenting the 2016 budget, Seth Terkper said: “We are implementing several programmes to secure the bright medium term prospects of the economy, notably through substantial investments in the oil and gas sector among others”.

As the price of crude oil continues its decline, Prof. Kusi explained that this will severely impact the country’s growth prospects.

“The implication is that the medium-term prospects are completely undermined because the medium-term prospects are based on these new oil projects. Of course, some of these projects will slow down due to the low prices. The TEN Project [expects its first oil in mid-2016] though they have started, may not have the enthusiasm they had.

“Also, this price fall means that investment in new exploration is not likely to come,” he said.

The price of Brent crude has fallen from US$115 in June last year to about US$37 per barrel as at Thursday.

A fall below US$36.20 will be the lowest since July 2004. Analysts said such a move in the run-up to year-end will be likely.

Price forecasts for the coming year show that the worsening trend is not likely to rebound. Credit rating agencies like Moody’s have downgraded Brent crude oil for 2016, adding that prices could average around US$43 per barrel in 2016, as compared to previous estimates of US$53 per barrel.

 

The ratings agency further stated that the price could reach as low as US$30 per barrel in 2016, a situation that could spell doom for Ghana’s oil revenue projections as well as prospects which hinge on expansion in the oil sector.

Apart from its negative impact on the medium-term prospects, the low price of oil could force government to cut its oil revenue expectation of GH¢2billion, which is 1.3 percent of GDP.

Mr. Terkper in presenting next year’s budget based oil revenue expectation on a barrel of oil selling at US$53.05; but the price has since declined to about US$37 — more than 25 percent fall, prompting concerns that government will head to Parliament to cut its oil revenue expectation.

The Finance Minister made a similar cut earlier this year after prices of crude oil had fallen by more than 50 percent. The revenue expectation was cut from GH¢4.2billion (3.1 percent of GDP) to GH¢1.5 billion (1.1 percent of GDP).

Prof. Kusi said in an interview that the ministry’s decision not to hedge the price of the country’s oil continues to have a debilitating effect on the economy.

He argued that apart from not hedging, the country’s petroleum benchmark pricing is ineffective and does not reflect trends in the market, especially at a time when the price of a barrel of oil predictably could reach US$20 — only for it to fix price at US$53.05 per barrel.

He is confident that the recent oil price performance on the world market will push government to cut its oil expectation revenue expectation in coming weeks, but Mr. Terkper in an interview revealed it is too early to talk about cutting oil revenue expectation, adding: “The budget is not even out of the House [Parliament] and the global situation is still volatile.”