Resources sector slump will hit Africa, but offers chance to boost governance

Image: Flickr, Anthony
Image: Flickr, Anthony

The price of Africa's natural resources has been affected by current turmoil in world markets. Uncertainty, which in markets translates into volatility, is now substituted by pessimism and panic, translated into decreasing stock markets worldwide.

Global economic growth is expected to slow soon and consumer spending and demand are falling rapidly. Russia and Brazil are not being left out and even China is affected as its export-led growth is no longer possible without continuous United States deficit spending. For the first time since 2002 its growth rate will turn into single digits this year.

The natural resource sector is not immune to the global economic downturn. Its sensitivity to the negative economic sentiment is reflected in a decreasing trend of oil, coal and copper prices, all of which are mainly used to fuel industrial activity and energy supply. As ingredients for luxury goods, platinum and diamond prices have been slipping as well.

The only non-renewable that is positively affected by the financial market turmoil is gold. In order to meet liquidity demands of commercial banks in crisis, central banks are currently pumping money into the economy, which means that money is losing its value.

Under these inflationary circumstances investors flee into gold as a safe haven and protection in bearish times. An increase in the demand for gold is what we see in the current crisis, accompanied by a similar increase in its price.

Africa is not directly affected by the credit crisis, due to a relatively new and underdeveloped banking system. But the indirect effects are considerable.

Although on a less destructive level than in the US or elsewhere in the world, stock markets have been losing value because of a slowdown in worldwide demand, negatively affecting Africa’s exports.

State revenues will go down and with continuous inflationary pressure, provoked by the credit crisis, Africa’s governments will have a hard time managing their macro-economy and feeding the mouths of their poorest at the same time.

Africa’s exports mainly consist of natural resources such as oil, coal, copper, cobalt, diamonds, platinum and other minerals, all of which have seen a drop in prices. This is bad news for their producers, who will see their profits vanish and demand for their products slow down. Lower prices also lead to unprofitability of exploitation, putting jobs at risk.

There might be a positive side to all this, however. Empirical research and logical thinking tells us that countries show weaker governance structures in the face of a resource boom.

In bullish times, employers, authorities and state representatives are tempted to focus on exploiting the natural resources sector to the fullest, watching their profits break records, revenues boosted and amounts in their bank accounts increased. Sky-high prices and never-ending demand make authorities greedy, often neglecting the needs of employees, constituents, and the poor.

The current economic outlook brings an end to the resource boom of the previous year, in which oil prices rocketed to almost $150 a barrel in July. Although still higher than two years ago, prices have gone back to lower levels, taking pressure away from producers and their employees. These circumstances might not benefit economic practices, but can certainly create opportunities to improve governance.

Slower economic times can be used as a time to calm down on other fronts as well and reflect on ways of strengthening governance. State representatives, civil society organisations and international institutions must seize this opportunity to make authorities think about different ways of governance now that they have time to focus on issues other than making giant profits.

This scenario is true for most extractive industries, except for gold. Prices and demand for the safe haven commodity in turbulent times are booming. This is good news, since South Africa has the highest gold reserves in the world. The sector is largely export-orientated, so the profitability of mines depends significantly on international gold prices.

Higher gold prices enable gold producers to invest more capital in developing existing resources in mines, activities that are necessary because some of the older mines are reaching the end of their operating lives, but are unprofitable under lower gold prices.

The gold boom is definitely a time of opportunities because of profitable mining and increased revenues. And with a lot more unrest and turmoil to come, gold will be in the hearts and minds of investors in the foreseeable future.

But close attention has to be paid to any deterioration of governance practices. The lesson we learnt when we identified the existence of the resource curse years ago is still valid today. It’s not all gold that glitters.

• Kroon is Visiting Researcher at the Governance of Africa’s Resources Programme of the South African Institute of International Affairs based in Cape Town.