Gabon’s Investment Opportunity May Lie Beyond Oil In 2018
Gabon is a country of potential, and investors may want to consider the investment opportunity that lies beyond its oil reserves.
Libreville, the capital city in the west-central African country, is said to be named “free town” in French in recognition of the freed slaves from the ship “Elizia” in 1849.
The city of freed slaves became the chief port of French Equatorial Africa from 1934 to 1946 (after becoming a French territory in 1910) and was a battleground in World War II, leaving the free slaves in the midst of occupied territory until independence in 1958. To be free in a colonized country is ironic in a historical context but symbolic of Gabonese duplicity.
From the moment of landing at Gabon’s Leon M’Ba International Airport, a visitor gets a taste of a country experiencing two stories: a resource rich country partnered with the West and young emerging African economy attempting to find its way outside of oil.
The story of resources in the country is well documented, with significant supplies of manganese, uranium, iron ore, timber, and oil. Oil is the hallmark export with the country exporting approximately 188.4 thousand barrels per day (mbbls/d) of the 210.1 mbbls/d produced.
The high oil production with a relatively small population (at around 1.93 million people) underwrites a nearly $8,000 GDP per capita, which, in real terms, is approximately double that of 2001.
The troubling sidenote is that $8,000 GDP per capita is less, in real terms, than the near $11,000 in 2011 and significantly less than the near $21,000 in 1998 when GDP per capita is adjusted for purchasing power parity.
Gabon’s export of timber accounts for roughly 20 percent of total Africa timber exports with Gabon also ranking fourth globally for manganese production.
Vulnerability to oil
Despite the growth in other resources, Gabon remains vulnerable to oil in the short and long-term. First, oil reserves are likely to be depleted by 2030, forcing the government to create an alternative economic plan.
Secondly, absent new discoveries, production in the country, according to the government, may drop to 150 mbbls/d. The current sub-$80/bbl Brent price cannot make up for the 25 to 30 percent production drop over the next 10 to 12 years.
Third, economic performance for Gabon is drastically susceptible to oil price fluctuations. The economy from 2015 to 2017 manifests these challenges as growth slowed to sub-one percent in 2017 from right under six percent in 2013, as oil prices plummeted, yet all the while still accounting for 80 percent-plus of Gabonese exports. Some observers worry that growth could turn negative if oil prices rapidly fall again (similar to 2014).
The infrastructure plan
Gabonese officials acknowledge infrastructure is crucial to its further economic growth, particularly for the development of industry beyond oil.
The government’s infrastructure plan—codified in the Plan Strategique Gabon Emergent, (PSGE) or the Emerging Gabon Strategic Plan—is only about 25 to 30 percent implemented.
The roads, railways and ports are still a work in progress. Those with an interest in the timber sector remain curious about the government’s ability to find the right firms and local talent to carry out the projects, particularly with most projects outside Libreville. Locals are not necessarily raising their hand for the jobs despite higher salaries.
Despite these challenges, Bechtel is driving the development of a $25 billion infrastructure plan in partnership with Gabon. The Gabon government and Bechtel have jointly established a national infrastructure agency to oversee the ambitious projects for the country, with Bechtel also pushing forward on efforts to strengthen and train-up the local capacity in these projects.
Debt, stable government, and the future
All the infrastructural initiatives however underscore the good and bad of the Gabon story.
Debt remains a pressing matter with both Gabonese officials and the International Monetary Fund (IMF), which is providing support to the country.
Debt ballooned from 33 percent of GDP in 2014 to 55 percent of GDP in 2016, with Moody’s, a rating agency, downgrading the debt in consecutive years and estimating that the debt level may only broadly stabilize at 60 percent of GDP.
Moody’s notes that any delay in disbursement of financial support from the IMF and the rest of the international community—projected at around three percent of GDP in 2018 and two percent of GDP in 2019—means that alternative financing would likely come at a significantly higher cost.
The country also has a bad history of missing debt payments, having missed two coupon payments in the past decade. Payments were made during the grace period to avoid default.
The country also temporarily failed to make voluntary payments on the sinking fund for Gabon’s 2017 bonds. Gabon, however, deserves credit for paying the $700 million debt owed to the private sector in 2014, albeit, at the same time, receiving some criticism for accumulating that debt in the first place.
Gabon is run by strong and stable hands. The Bongo family continues to rule now beyond three decades. The country has only had three presidents since independence: Leon M’Ba (1961 to 1967), Omar Bongo Ondimba (1967 to 2009), and Ali Bongo Ondimba (2009 to present), who was re-elected in 2016 by a tiny margin of 6,000 votes.
The 2016 street protests following Ali Bongo’s re-election were relatively small compared to past protests (i.e., 1993), with relative peace, notwithstanding the economic scepticism amongst locals.
The reality that one-fourth of the Gabonese population is foreign plays into the economic concerns, with many locals questioning the upside for themselves.
No jobs or very low pay because of the foreigners, says one local worker, signifies that the inflow of investment may not benefit locals.
The takeaway remains the same: diversity in investment inflow and economic activity is more the imperative than diversity in workforce, at least in the eyes of locals, donors, and investors, if the country is to change the view of international observers along with the trajectory of its balance sheets.
Kurt Davis Jr. is an investment banker with private equity experience focused on Africa and the Middle East. He earned an MBA in finance, entrepreneurship and operations from the University of Chicago and J.D. in tax and commercial law at the University of Virginia’s School of Law. He can be reached at email@example.com.
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