Low demand may hurt regional exports in 2015

The persistent slump of international oil prices mainly due to low global demand, while good for petroleum importing countries like Rwanda could also hurt export performance in 2015, economists say. Precisely put, low international oil prices could be a double edged sword if global economic activity remains wobbly. While 2015 global growth forecasts appear to be generally positive, they’re not necessarily glorifying when juxtaposed with other factors such as the low demand for oil which can be directly linked to low economic activity or production. For instance, IMF forecasts that advanced economies (USA, Europe and Japan) will grow by 2.3 per cent in 2015 from 1.8 per cent last year but demand for oil will remain low throughout the first half of the year. Unless low energy consumption means improved efficiency in production (which it isn’t) the projections for faster growth may not add-up. Big and industrialized economies are not buying oil to fuel their industrial production which should be a concern to raw material supplying economies such as those in sub-Saharan Africa. Experts say that if oil producing countries start making less money, it will deprive the international market of petrol dollars and this in one way or the other could hurt global consumption. There are two contrasts, the first regards USA which used to be the leading importer of oil but not anymore after its own shale oil boom. As the largest economy in the world, USA’s oil consumption is over 18 million barrels a day but experts expect that country’s local oil production to rise to ten million barrels a day in 2015 from 9 million barrels previously. It means if USA attains oil independence, its anticipated growth of 3.1 per cent in 2015 from 2.2 per cent yesteryear will not benefit oil producers to re-balance the market; and the petrol dollars will continue to dwindle on the international market. With USA consuming less oil, it leaves only China whose daily consumption is about 20 million barrels, as the second largest economy. China’s fast growth has been the pillar of the global economy in the past decade, with the engines of its industries guzzling billions of barrels of oil as they processed millions of tons of raw export materials and minerals from Africa. But that growth is beginning to dwindle in the processing slowing down the pace of global growth. In 2015, China’s growth will drop to 7.1 per cent from 7.4 last year, according to IMF and this could have negative effects on especially mineral exporting countries. So with a slowing economy, China won’t be buying as much oil and to make matters worse, Japan, the third largest economy in the world and among the influential advanced economies, is also expected to struggle in 2015. Two years in a row, 2012 and 2013, Japan’s growth remained stagnant at 1.5 per cent. Instead of improving, it dropped further to 0.9 per cent in 2014 and this year, analysts have condemned it to a 0.8 per cent growth, point lower. However, it’s highly anticipated that Prime Minister Shinzo Abe’s administration is taking steps to shore up growth for this year by announcing a $26billion stimulus package and also postpone a proposed sales-tax increase until 2017 -- a move that would add 0.3 percentage point to growth. Impact on Rwanda At home, Rwandan authorities expect low fuel prices to reduce inflationary pressures in form of low commodity prices driven by low transport costs, this has already happened with transport tariffs going down after tariffs at the pump were reduced. The low oil prices also mean Rwanda will spend less of its dollar reserved to import fuel; the price for a barrel entered 2015 trading in the region of $60 per barrel, last seen about five years ago. In fact if Rwanda had wide storage capacity, it would be useful to stock as much fuel supplies as possible while the low price bonanza lasts. But that’s as far as the benefits go. Dr. Thomas Kigabo, the chief economist National Bank of Rwanda, says if oil prices are tumbling because of poor demand resulting from low economic activity among major economies, then that would hurt Rwanda’s export prospects. If China is not buying oil because of low industrial output, it means there will be no need for raw materials such as Rwanda’s Coltan or Wolfram. “So yes, low fuel prices could also have negative impact on us in form of low demand for our exports,” said Kigabo. 2014 export performance In the first eleven months of 2014, the value of Rwanda’s exports increased by 4.9 per cent; this increment is lower than 24.5 per cent registered in the same period of 2013. But that’s because in between January and November 2014, the value of Rwanda’s minerals dropped by 9 per cent while that of tea exports also sagged by 6.8 per cent. The 4.9 per cent value gain in Rwandan exports was thanks to coffee whose value gained 11.9 per cent, re-exports gained 22.3 per cent while non-traditional sells returned 24.7 per cent in the first eleven months. Conversely, Rwanda bought more goods than it sold in the first eleven months of last year which saw the value of imports surging by 8.5 per cent. 2015 oil forecast Normally, when economic activity is high, global oil consumption too tends to be high as countries seek energy resources to fuel production. But 2015 oil consumption forecasts don’t seem to support that hypothesis. While IMF projections promise a buoyant global economy this year, a report from OPEC, the alliance of petroleum exporting countries shows that oil demand will drop by 70,000 barrels per day. The USA will dampen OPEC’s spirits further after USA cleared plans to start supplying 1 million barrels a day of its own oil effectively altering the previous status-quo. It’s going to a less profitable year for oil producing countries as reports suggest a 1.83 million bpd surplus in the first six months. So a new competitor in the USA, excess supplies among OPEC countries and low global production will compound the problem of low demand problem and keep oil prices pinned down for the most part of 2015. There will be winners and losers, small and big losers. If demand for exports is weak on the international market, Rwanda could always seek to strengthen its trade ties within the region where the value of her earnings to EAC increased by share grew by 14.7 per cent between January and November last year. If Rwanda conducts more business within the region than with Europe or Asia, it could circumvent the risk of weak demand while at the same time drawing benefits of low fuel prices. However, the region is likely to lose oil exploration related FDI; given the current gloomy prospects, few investors will be interested in sinking their money into oil ventures. It’s a prospect that the likes of Kenya and Uganda that have plenty of virgin oil deposits, don’t want to hear but one that they’ll have to contend with nonetheless.

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Low demand may hurt regional exports in 2015