A regional leader: Oil remains dominant, but state-led efforts to diversify are under way

Since 1953, when oil was first discovered near Port-Gentil, Gabon’s economy has been dominated by the petroleum industry. According to the BP “Statistical Review of World Energy 2012”, Gabon is the sixth-largest crude oil producer in sub-Saharan Africa and has the region’s fourth-largest proven reserves.

Years of oil rents have lifted Gabon firmly into the ranks of the upper-middle-income countries. At $11,045 in 2011, according to the IMF, Gabon has the second-highest per capita GDP in sub-Saharan Africa. Like many oil-rich economies, consistent economic growth has not penetrated beyond the extractive sectors. Consequently, President Ali Bongo Ondimba, who was elected in 2009, has worked to shift the economy toward diversification and the development of the services and industrial sectors.

DIVERSIFICATION: For the past 40 years, Gabon’s economy has been dominated by oil. According to statistics provided by the General Directorate for the Economic and Fiscal Policy (Direction General de l’ Economie et de la Politique Fiscale, DGEPF), in 2011 oil accounted for approximately 52% of GDP, while the IMF estimates that about 58% of government revenue comes from the petroleum sector. Yet in recent years Gabon’s daily production has declined, falling 34% from its peak in 1997 to 245,000 bpd in 2011, according to the “Statistical Review of World Energy 2012”. To decrease dependence on oil revenue and promote a more sustainable development trajectory, the government has implemented a plan to diversify the economy toward value-added processing of natural resources, as well as encourage growth in health, finance and tourism. “The goal of the government’s economic diversification strategy is to create jobs and stimulate non-oil economic growth, by encouraging the creation of additional value across various sectors,” Pascal Yembiline, the principal country economist for the African Development Bank (AfDB), told OBG. “To achieve this, the government is investing in infrastructure and working to improve the business environment of the country to attract additional foreign investment,” he added.

A key feature of the Emerging Gabon plan is to encourage private-sector investment in the economy. From the construction of special economic zones (SEZs) to the creation of a National Agency for Public Works (Agence Nationale des Grands Travaux, ANGT) to manage infrastructure projects, the government is working to create the enabling conditions necessary for the private sector to become the principle driver of growth. Inspired by South Korea and Singapore, the goal of the strategic plan is to transform Gabon into an emerging economy by 2025.

GROWTH: Gabon has rebounded strongly from the economic crisis of 2008-09. As the economy still depends largely on natural resource extraction, low prices and weak global demand for commodities in 2009 shrank GDP by 1.4%, according to statistics provided by the DGEPF. Growth, however, returned in 2010 and has remained robust since. The economy grew by 6.7% in 2011 and is forecast to grow at 5.6% in 2012, according to the DGEPF. Rising prices for oil and manganese, Gabon’s principal mineral export, in addition to intensive capital spending in preparation for the 2012 African Cup of Nations (Coupe d’Afrique des Nations, CAN 2012) football tournament, which Gabon co-hosted with Equatorial Guinea, were the principal drivers of economic growth in 2010 and 2011. The government, however, has continued with an ambitious infrastructure development programme in line with its economic diversification plan. Consequently, on the back of public sector consumption, economic growth should remain relatively strong in the short and medium term as the government continues to invest in infrastructure and economic development projects and current projects under development reach completion.

As oil is unlikely to cease being Gabon’s principle export for the foreseeable future, oil prices will remain the key driver of the economy. Commodity prices are generally forecast to remain high on increasing demand from emerging markets. A principle downside risk to growth, however, is the collapse of demand for oil and other commodities in North America or China, and a possible recession in Europe. The government does take a conservative approach to budgeting, but if oil drops below $60 a barrel, it will significantly hamper the government’s ability to invest in capital projects like infrastructure and economic diversification initiatives, as Gabon’s budget is structured around a long-term oil price of between $60 and $80 a barrel.

RESOURCES: Although diversification efforts began in 2009, it will take time before they bear fruit, which means that Gabon will have a principally resource-based economy for the foreseeable future. Extraction-based industries account for over 85% of exports and more than half of GDP. The primary sector is regarded as well run, not only due to its comparative stability, but also thanks to the government’s long history of working with it to oversee extraction. “Unlike many of the countries in the region, Gabon has long relied on the private sector to manage resource extraction. Consequently, the efficiency of the sector is generally quite high,” Jean-Pierre Colnard, the senior advisor at the French Economic Mission, told OBG.

Crude oil is, by far, Gabon’s largest export. In 2011, the country produced 89m barrels of petroleum, accounting for 0.2% of world production. The majority of Gabon’s reserves are mature and consequently the long-term trend is towards lower production numbers. The sector is controlled largely by foreign multinational oil companies, with Total Gabon, the local subsidiary of the French firm, the largest producer in the country. Gabon exports about 90% of all production, as domestic consumption is limited given the small population. About half of all exports go the US with the remainder going largely to the EU and Malaysia. Gabon has not traditionally been a producer of natural gas, however, a recent ban on gas flaring, government investment in a natural gas power plant and plans for a fertiliser plant have fostered a nascent domestic market for gas.

Manganese is Gabon’s second-largest export, in dollar terms, and the country is the fourth-largest producer of manganese in the world. The mineral is exploited by Compagnie Minière de l’Ogooué (COMILOG), jointly owned by the ERAMET Group of France (67.25%), the Gabonese government (25.4%), and a private investor. Although production dropped by about 32% in 2009, exports rebounded in the subsequent year by 49% and have continued to rise, reaching 3.38m tonnes in 2011. Gabon also has unexploited deposits of gold, nobium, uranium and iron ore, with projects to exploit these resources planned. Overall, mining accounts for about 3.2% of GDP.

Before oil was found in Gabon, the country’s export economy was based almost exclusively on timber. 85% of the country is covered by forest, representing an area of 22m ha. There are currently about 9m ha of logging concession under management and the overall market has been estimated at 400m cu metres. In particular, Gabon is a global leader in the production of Okoumé, a type of wood used in the manufacture of plywood and veneers. Up until 2009, forestry accounted for between 1.5% and 2% of GDP. In 2010, however, as part of the country’s diversification efforts, the government banned the exportation of unprocessed logs to encourage downstream processing domestically, halting the vast majority of exports and, as a result, slowing activity in the sector and the economy overall (see Agriculture & Forestry chapter). In 2011, as a result, forestry accounted for 0.5% of GDP, with a number of producers focused on upgrading their processing facilities.

VALUE ADDING: As part of the economic diversification strategy, the government, in partnership with the private sector, is looking into increasing value-added activities elsewhere in the primary sector, including agriculture. In 2011, the government signed a $1.5bn agreement with Olam International, a Singaporean company, to develop a 300,000-ha palm oil plantation (see Agriculture & Forestry chapter). Additionally, Olam has invested €183m in a 28,000-ha rubber plantation and processing plant, which should be operational in 2019 with a production capacity of 62,000 tonnes a year. There are plans to develop cocoa, coffee, biofuels and fish farms in addition to the modernisation of traditional agriculture. In 2011, the sector represented 3.4% of GDP.

MACROECONOMIC PERFORMANCE: Gabon’s macroeconomic performance has been relatively strong over the past few years. According to the Central African Banking Commission (Commission Bancaire de l’Afrique Centrale, COBAC), Gabon is the sole country in the CEMAC bloc that has met all the fiscal convergence criteria of the 1999 CEMAC treaty to promote fuller regional economic and monetary integration. The treaty calls for members to integrate their public deficits, debt and inflation levels.

At the heart of the economic crisis in 2009, weak commodity prices shrank the current account and fiscal surpluses and turned growth moderately negative. The current account balance went from a surplus of 22% of GDP in 2008 to 8.2% in 2009, according to the “African Economic Outlook” (AOE). In 2012 it is projected to be 11.2%. Meanwhile, according to the ratings agency Fitch, the fiscal surplus reached a low of 1.8% of GDP in 2010 due to capital spending increases. A rebound in demand for commodities and the rising price of oil has re-energised growth in Gabon and improved the country’s fiscal position despite higher than forecast capital spending to support economic diversification. Gabon’s fiscal surplus improved to 3.4% of GDP in 2011, lower than the 5.1% that was initially forecast. The fiscal surplus, which should near 6% in 2012, will be underpinned as long as oil prices hover above $90-95 per barrel, but could decrease if they drop below this level. Foreign direct investment totalled $4bn during the 2010-12 period.

Given that oil revenues account for about 58% of government revenue, oil-price volatility continues to exert downside risks on the government’s fiscal position. While government revenue remained at approximately 30% of GDP in 2010 and 2011, according to the AEO, Gabon’s non-oil budget deficit was 22% of in 2011. Government oil revenues represented 19.3% of GDP in 2011, up from 17.8% in 2010. Budget plans call for a reduction of expenditures in both current and capital spending. The 2012 budget calls for a reduction of spending to about 17% of GDP in 2015 from about 20% in 2010. Capital expenditures will be lowered to 6% of GDP in 2015 and 5% of GDP in 2020.

The 2013 budget, adopted in early October 2012, totalled CFA3.14trn (€4.71bn), according to Yves Fernand Manfoumbi, the budget director. This was up 28% on the original budget for 2012 and 14% on the revised one published in September. This breaks down into revenues of CFA2.63trn (€3.95bn), of which CFA1.44trn (€2.16bn) will come from oil and CFA1.19trn (€1.79bn) from non-oil, and borrowing of CFA508.7bn (€763.05m). On the expenditure side, CFA1.34trn (€2.01bn) will go to operations, CFA508.6bn (€762.90m) to servicing the public debt, CFA1.07trn (€1.61bn) to investment and CFA224.4bn (€336.60m) to loans, deposits and advances.

Initiatives supported by the World Bank and the IMF have led to increased efficiency in the public service. The government has worked attempted rationalise its bureaucracy by conducting an audit in 2010 that resulted in the elimination of thousands of phantom jobs. The government has also improved recruitment policies and, during the cabinet shuffle in February 2012, consolidated ministries. In addition, the World Bank is working with the government to implement public spending and management reforms.

POLICY: Gabon’s monetary policy is managed by the Bank of Central African States (Banque des Etats de l'Afrique Centrale, BEAC), which maintains a currency peg with the Euro at €1:CFA655.957 and an inflation target of 3%. The BEAC’s interest rate is 4% with a repurchase rate of 5.75%. Gabon’s inflation rate was 2.3% in 2011 according to the General Directorate of Statistics (Direction Generale des Statistiques, DGS) and is forecast by AEO to increase to 3.1% in 2012. Foreign reserves have shown solid growth, rising to nine months of imports in 2011, up from seven in 2010. Government debt, at 20.4% of GDP according to Fitch, is well below its neighbours and should decrease further ahead, falling to 11.7% of GDP by 2015. According to the AEO, debt service represented 5.8% of exports in 2011. The government has set up a department to manage foreign debt, which was over 60% of GDP in 2003, but has since fallen rapidly.

Standard & Poor’s (S&P) downgraded its outlook on the country to “negative”, confirming its BB- and B ratings for long-term and short-term local and foreign currency sovereign risk, respectively. S&P downgraded Gabon due to concerns over its 10-year, $1bn Eurobond, due in 2017 – specifically that the country had not paid amounts committed to the bond’s sinking fund, indicating a deterioration of fiscal management, according to the global ratings agency. At the same time, however, Fitch confirmed its BB- rating and raised its outlook from “stable” to “positive”.

INFRASTRUCTURE: As part of Emerging Gabon, the government is investing in infrastructure nationwide. The preparation for CAN 2012 dominated the agenda in 2011, including upgrades to stadiums and the construction of the new Friendship Stadium in Libreville, an upgrade to the Libreville airport, and new road and interchange construction in the capital.

Now, transportation, energy and housing are all priorities for government and private sector investment. ANGT plans to manage 175 projects worth $20bn over the next five years. More than half the funds will be spent on transportation projects, with the remainder in the energy, education, telecommunications and housing sectors. ANGT is actively looking for private-sector partners in these areas. Meanwhile, international institutions like the AfDB and World Bank are also investing in Gabon (see analysis).

TRADE: Gabon’s current account balance remained positive in 2011 at 8.8% of GDP. It is expected to rise to 9.6% of GDP in 2012. According to the DGS, exports grew 8% to $9.7bn in 2011, while imports grew 13.8% to $3.5bn. Gabon’s principle trading partners were the US, with about 59% of all exports, followed by them EU, China, Malaysia and South Korea. Fuels and mining products accounted for 83.6% of all exports with agricultural products second at 4.5%. The EU was Gabon’s principle source for imports, with 65% of the market, followed by the US, China, Japan and Cameroon. Manufactured products accounted for 70% of imports, followed by agricultural products at 15.7%, and fuel and mining products at 14%.

Gabon is a member of all the main regional bodies for economic cooperation – the Economic Community of Central African States, the African Business Law Harmonisation Organisation, CEMAC and the AfDB. However, trade with its neighbours is small compared to Europe and North America, and is limited to foodstuffs and agricultural products, because of poor transportation links and a lack of diversification. The rate of Customs duty applied to products from non-CEMAC countries varies between 5% and 30%.

BUSINESS CLIMATE: Creating a more open business environment is a key part of the government’s economic diversification plan. The government has been working with the World Bank to improve regulation and increase the efficiency of the bureaucracy, and has implemented land reforms, overhauled the national property register to reduce the time it takes to get property titles and created the ANGT, which is managed by the American firm Bechtel, to streamline and oversee large public works projects. New laws and regulations have been drafted to govern public-private partnerships (PPP) and public procurement, and the state has signed up for the African Peer Review Mechanism of the African Union. The Chamber of Commerce was privatised in February of 2011 and is working on programmes to support both smaller local businesses and foreign firms.

As part of the Emerging Gabon strategy, the government has created two special economic zones (SEZ) in partnership with Olam International, one outside Libreville at Nkok and the other at Port-Gentil on Mandji Island. The SEZs will offer significant incentives to companies that invest, including tax holidays, no Customs duties, guaranteed labour, subsidised electricity and other incentives. So far, the SEZ have drawn interest from mainly Asian firms (see analysis).

Erik Watremez, a partner at Ernst & Young Gabon, told OBG, “Gabon is in the middle of many changes. From infrastructure development to investments in health and the improvement of the business environment, the government is working very hard. Still, implementation remains a key challenge in many sectors in need of reform.” Many reforms, including the new hydrocarbons code, have been held up in Parliament and have yet to be adopted. Moreover, the capacity of the civil service to implement new regulations is limited in some cases. Consequently, the “Doing Business” survey produced by the International Finance Corporation and the World Bank still ranks Gabon at 156 out of 183, a slight improvement from the 2011 ranking of 160. Substantial improvements were noted in access to credit and to a lesser extent in getting construction permits.

Gabon still struggles with perceptions of corruption. Transparency International ranks Gabon 100 out of 182 countries. In June 2011, the Extractive Industries Transparency Initiative’s (EITI) board renewed Gabon’s candidate status as “close to compliant”, giving the country an additional 18 months to fully comply with EITI guidelines. As a country that is “close to compliant”, Gabon can be “reasonably expected to achieve compliance within a short period”.

HUMAN DEVELOPMENT: Gabon’s relative wealth and small population, when compared with its neighbours have helped Gabon to achieve a level of development that surpasses most in the region. However, it lags behind most upper-middle-income countries with a comparable per capita GDP on many indicators. Life expectancy in 2010, according to the World Bank, was 62 years, and the literacy rate was 88%. The population growth rate is 1.9% and it has a high rate of urbanisation at 88%, which contrasts sharply with its neighbours. Gabon ranks 106 in the UNDP Human Development Index, putting the country in the company of nations with a healthy GDP per capita.

Poverty, especially in rural areas, income inequality and unemployment remain pressing problems. According the IMF, 32.7% of Gabon’s citizens live in poverty, while the richest quintile of the population receives half the national income. Unemployment remains high at around 16%, although 30% of young people are without jobs according to the AEO. “Gabon has a great challenge transforming immense natural-resource wealth into services that benefit the vast majority of Gabonese,” Colnard told OBG Education is a key difficulty in Gabon. Despite almost universal enrolment in primary school, secondary and post-secondary education, the quality is far below that required by the labour market. This has led to a structural labour shortage despite high unemployment. Rick Tsouck Ibounde, the country resident economist at the World Bank, told OBG, “The real challenge for Gabon is to improve education and health. That is the only way over the long term to ensure that oil rents flow towards the citizens of the country.” The shortage is acute in careers requiring technical specialisation, like financial analysts and petroleum engineers. In response to this, the government has forged partnerships with the private sector to train students in specific technical areas. For example, to build skills in the oil services segment, the government has partnered with international oil companies to set up the Institute of Oil and Gas (Institut de petrol et gaz, IPG). The school graduated its first cohort in November of 2011. The Chamber of Commerce and BGFI Bank have both set up new business schools to train professional middle managers as well.

Health is another challenging sector for Gabon. Significant shortages exist with regard to hospital beds and childbirth facilities, especially in the rural zones. According to UNAIDS, Gabon has an HIV prevalence rate of 5.2%, which translated into about 46,000 people living with the virus. Infection rates have fallen, however, due to increased public investment in treatment and awareness through the Programme to Fight Against Sexually Transmitted Diseases and AIDS.

Legally, women in Gabon enjoy equal rights with regard to access to education, investment, employment, pay and finance. According to the UNDP, there is no significant gap between the sexes with regard to access to education or health care. A number of women are found at the highest ranks of both the civil service and the private sector. Indeed, in the most recent cabinet shuffle in February 2012, the number of female ministers was increased from five to eight, despite a leaner cabinet of 29 ministers.

CHALLENGES: In spite of solid growth and aggressive efforts at economic diversification, challenges remain with regard to achieving equitable economic growth. Public sector efficiency and corruption remain barriers to the full implementation of the Emerging Gabon plan. Bureaucratic inertia and ineffectiveness can lead to long lead times for project approval and public investment of questionable efficiency. While the government has taken steps to reform the bureaucracy and has created independent agencies such as the ANGT to advise and manage projects, it is unclear if the agencies will succeed in transferring skills to public service over the longer term. Furthermore, infrastructure deficits exist in many areas, with power demand exceeding supply, many roads periodically impassable and the port at Ownendo congested.

OUTLOOK: Despite the challenges, the outlook remains promising overall. Prices for oil and other natural resources remain high, as China and other markets fuel demand for raw materials. This will allow Gabon to sustain its much needed capital spending programme to invest in the foundations necessary for successful economic diversification. New infrastructure, combined with an ambitious reform agenda, could set the stage for sustainable long-term economic growth as Gabon opens its economy and invests in its vast potential in the mining, forestry, tourism, and agriculture sectors – provided it is able to reduce inefficiencies and strengthen development indicators.