Rising Oil, Gas Prices to Weigh on Growth and Fiscal Outlooks

African countries face long-standing structural challenges in terms of generating enough reliable electricity to meet the demands of a fast-growing population due to ageing infrastructure and limited investment capacity, taking a toll on national utility companies and distribution grids. Such infrastructure plays a crucial role in enabling the proper functioning of multiple economic sectors, including extractive industries and manufacturing. According to the IMF, power shortages cost the continent about 2 to 4% of GDP a year.

The energy price shock triggered by the war in Ukraine exacerbates these long-standing challenges. The crisis highlights the heavy dependence of African countries on fossil fuels and limited electricity generation capacity from renewables, such as wind and solar (Figure 1), with hydropower the main exception.

Figure 1. Africa, electricity generation and price pressures by sources

% of total electricity generation (LHS), % change year to date (RHS)

Note: Price change as of 31 March 2022. No price change available for other energy sources. Source: International Energy Agency, World Bank, Scope Ratings GmbH

The informal sectors are especially vulnerable

The informal sector, a crucial component in many countries’ economies, is particularly vulnerable. Small businesses rely heavily on diesel generators. Rising fuel and food prices will squeeze subsistence incomes the most and push more people below the poverty line, exacerbating social pressures already intensified by the Covid-19 pandemic.

Higher electricity tariffs as generation costs rise will likely push up producer prices and weigh on industrial output in addition to squeezing private consumption. Electricity – together with housing, water, gas and other fuels – accounts for a significant share of the consumer price index (Figure 2) in most countries.

Figure 2. Africa, weight of electricity and food in the consumer price index

% of total

Source: International Monetary Fund, Scope Ratings GmbH

The fiscal outlook of African countries is likely to weaken

As inflationary pressures intensify, the fiscal outlook for African governments is likely to weaken from lower growth, and thus lower revenues, and higher spending. Governments’ inclination will be to increase fuel subsidies to contain possible social discontent. Contingent liabilities will grow with state-owned utilities dependent on financial support to maintain or increase power generation while investing more in renewables.

Africa’s net exporters of energy products will not escape the adverse impact of higher oil and gas prices as state-owned electricity utilities also face higher input prices, even though the cost ought to at least partially be offset by higher export receipts.

Reliance on carbon-intensive fossil fuels highlights benefits of developing renewables sectors

The continent’s current reliance on carbon-intensive fossil fuels, subject to volatile global price patterns and sensitive to geopolitical risk, highlights the benefits of developing renewable energy capacity, particularly for countries that are net oil and gas importers. This will require sizeable upfront investment, not least to scale up transmission infrastructure and adapt to changes in the energy mix, with implications for budget balances, only partially mitigated by financial support as provided by international financial institutions and private investment.

South Africa, one of Africa’s biggest economies, is a striking example. The African Development Bank recently announced an African Energy Transition Facility to support the USD 30bn in investment needed for the country’s transition to renewables and relieving electricity-generation constraints (Figure 3).

Investing in renewables will contribute to South Africa’s climate change commitments by 2050, as more than 90% of electricity generation is derived from coal, accounting for 42% of gross national greenhouse gas emissions. State-owned utility Eskom, which accounts for 78.7% of government guarantees, has an unsustainable debt burden of more than USD 25bn (around 8% of GDP).

Figure 3. South Africa, stagnating electricity generation

Seasonally adjusted index, 2015=100

Source: Statistics South Africa, Scope Ratings GmbH

South Africa has one nuclear station, a power generation capacity that could contribute to meeting domestic electricity demand in the long run, but affordability remains a concern considering public debt has nearly doubled over the past decade to reach 72.8% of GDP in 2022/23 according to the National Treasury. Revamping the Koeberg nuclear plant and/or building a new reactor would require multibillion-dollar investment.

For a look at all of today’s economic events, check out our economic calendar.

Thomas Gillet is an Associate Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Thibault Vasse, Senior Analyst at Scope Ratings, contributed to writing this commentary.

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