South Sudan is acutely vulnerable to a prolonged period of low oil prices – but it should be an opportunity to deregulate downstream and reform the superfluity crude account. Brent crude oil prices fell to approximately $33 per barrel (bbl) on Monday 9 March, the worst of its kind fall in a day since two decade ago. Saudi Arabia, and its erstwhile non-OPEC (OPEC+) ally, Russia failed to agree on the 6th of march on proposed oil production cuts.
Earlier in 2020, oil prices had fallen to almost $45 per barrel, the lowest for years. Back then, the combination of shale oil production from the US and predictions about sluggish global demand growth, was to blame. Now the corona-virus, which has slashed Chinese oil demand more up to 20%, has added fuel to the fire.
Some OPEC members could decide to go renegade and pump out more barrels in the hope of compensating for the rapid decline in prices. Already the uncertainty has been devastating to oil markets, with the lack of coordination and trust among key OPEC and non-OPEC actors, fueling a new era of volatility.
For South Sudan, an OPEC observer member, its path to quickly ramp up production is limited by operational, underdeveloped oil sector, poor policy making in the industry, regulatory and infrastructure challenges. While non-oil GDP growth has shown negligible signs of improvement since independent, close to 99.5% of South Sudan foreign exchange revenues still come from oil exports.
South Sudan oil price budget benchmark has already been blown out of the water several times for the last decade. The latest boom is the surest sign that the 2020 oil price average may be well below $30 per barrel. Many countries that use commodity price benchmarks have not figured out how to weight Spanish Flu events – i.e. low probability, high impact – of which the Corona-virus is arguably one, in their budget assumptions. In this case, it is the manner in which Corona-virus has spread in a deeply-interconnected world that is alarming.
Global WHO Director-General Tedros Adhanom Ghebreyesus and his organization are at the brink of declaring a global pandemic for the third time, with more than 300,000 cases now reported worldwide. South Sudan economy has never fully recovered from the civil war that took placed in 2013 – 2017. The south Sudanese pounds (SSP) is still a classic petro-currency whose fate remains intrinsically tied to global oil prices, at least without a seismic shift in economic structure. That shift is not a short-term task.
Right now, the stance by South Sudan key economic actors to defend the pounds from plummeting into a hyper-inflationary ditch will likely be tested by the absent of South Sudan foreign reserves – the Central Bank should set a certain amount of foreign reserves threshold for devaluation but South Sudan is treacherously close.
About $11 trillion is believed to have been wiped off in global equities in a week into early March as a result of corona-virus lack of reserves in South Sudan can dramatically worsen the situation. And any action taken by South Sudan central bank could provide an indicator to foreign investment speculators of impending devaluation. The cycle would be aggravated if the few foreign investors begin to exit South Sudan equities and bonds amass. The pound could depreciate drastically, allowing speculators to arbitrage.
Devaluation would lead to increased importation costs for raw materials and other soft and hard commodities that have to be paid for using foreign exchange. Raw inputs for manufacturers will become more expensive and ultimate losers will be everyday consumers who will see further erosion in their purchasing power.
A Central Bank intervention to adjust the value of the pound, is almost certain if Foreign exchange reserves run below the threshold set. What is unknown is whether such an intervention will be heavily pre-emptive as the current official exchange rate is the shortest-run of stability that South Sudan foreign exchange regime has had in few weeks since the country peace process.
Recently, low interest rates in advanced economies have allowed South Sudan central bank to ease rates locally, but if oil prices continue to come under pressure, putting further pressure on the pound, there will be pressure to hike rates.
The combination of rising inflation which is currently at about 63% and pound devaluation risks may force the Central Bank’s hand on rates. All of South Sudan 2019 budget indicators; an oil production volume of 300,000 barrel per day, oil benchmark of $105, GDP growth rate of 0.03%, and inflation rate of 75% now appear out of reach, and will most likely result in a downsizing of expenditure plans in 2020.
Global investment bank Goldman Sachs has lowered its Brent oil forecasts to $30/bbl for Q2 and Q3, and by most estimates, the rest of the year will be gloomy. Demand is weak and dwindling, with cargo’s of East African crude blends from Kenya and other African countries now heavily discounted to buyers mostly in Europe or remaining unsold.
South Sudan needs to deregulate the downstream oil sector with a focus on gasoline, which promotes rent seeking and has fueled several inefficiencies within the downstream oil net. South Sudan spends approximately $500 million on unplanned subsidies every year alone, a financial burden that hampers development in other crucial sectors. The country is 3 years away from the next election cycle in 2023, under an administration that is shaky due to a coerced peace agreement by the regional bloc IGAD.
Thus, with little political capital to exploit here, there is probably no better time than this low oil prices environment to revisit this issue. Deregulation before the end of 2020, can at least give the current administration the opportunity to demonstrate the longer-term benefits of a liberalized oil market, without the political pressure of high petrol prices.