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LIBYA
SNAPSHOT
2015 Quarter 1
Inflation - The Libyan government keeps consumer prices low by using price controls and subsidies on various consumer goods. However, as the security
situation and government finances deteriorate, we expect to see consumer price pressures intensify.
Growth - The situation is extremely volatile at present, despite the price of Brent crude oil stabilising and the two opposition governments meeting to discuss
a possible resolution to the crisis. Persistent oil production disruptions pose significant downward risks to GDP growth over the medium term, though the
economy could bounce back relatively quickly if relative political stability returns.
National development plan - Economic policy considerations will remain low on the agenda until such time as a certain degree of stability has returned to the
country, both from a domestic security and political point of view.
OPPORTUNITIES
STRENGTHS
Libya has the largest oil reserves in Africa and much of it is still untapped.
Libya has significant solar power potential, which could be harnessed if the
political environment stabilises.
In the long-run, the end of the Qadhafi regime may be good for private sector
development, which could unlock massive growth potential.
If stability returns and investors believe such stability will last, the country
could very well see a surge in medium-term foreign investment.
Oil reserves will last more than 80 years at current production levels.
Oil and gas production easily covers the country’s external financing needs.
A massive stock of foreign exchange reserves and a large sovereign wealth
fund.
Authorities have more than enough foreign exchange reserves to protect the
currency.
VULNERABILITIES
WHAT IS BEING DONE?
Economy relies heavily on hydrocarbons for fiscal revenues and foreign
exchange earnings.
Divisive and on-going conflict between a myriad of ethnic, tribal and regional
groups that could prolong conflict; high terror risk.
Economy is heavily state-controlled; the business environment is extremely
challenging.
Decision-making is opaque and inconsistent, thereby exacerbating uncertainty
for market players.
Government laws and high political risk continue to inhibit the development of
the non-oil economy.
The country currently has two rival executive bodies, each claiming to be the
legitimate government.
No certainty about future economic policy; political issues will have to be
dealt with first.
Improvements can only occur when the current conflict in the country ends
and Libya is headed by a single national government.
MEGA TRENDS
Population
6,244,174 (July 2014 est.); Age 15 - 64: 69.1%
Population growth rate (%)
1% (2013 est.)
Life expectancy at birth
Total population: 76.04 years; male: 74.36 years; female: 77.82 years (2014 est.)
HIV/AIDS
Adult prevalence rate: less than 0.3%; People living with HIV/AIDS: 10,000 (2001 est.)
Adult literacy rate (age 15 and over can read
Total population: 91.0%; male: 96.7%; female: 85.6% (2015 est.)
and write)
Urbanisation
Urban population: 78.2% of total population (2013); Urban population growth: 1% (2013)
Population below $1.25 (PPP) poverty line N/a
Unemployment rate
19.6% (2013)
Employment (% of total)
Agriculture: 17%; Industry: 23%; Services: 59% (2004 est.)
Labour participation rate (% of total
population ages 15+)
53.0% (2013)
Business languages
English, Arabic, Italian
Telephone & Internet users
Main lines in use: 789,000; Mobile cellular: 10.24 million; Internet users: 1.03 million (2013)
Sources: CIA World Factbook, World Bank, ITU, UNAIDS & NKC Research
1
Total
Corruption Perceptions Index 2014 (1 least, 175 most corrupt)
Doing Business 2015 (1 best, 189 worst)
Global Competitiveness 2014-15 (1 most, 144 least competitive)
Economic Freedom 2015 (1 most, 178 least free) N/a
HDI Ranking 2013 (1 most, 187 least developed)
0
Source: NKC Research
Libya
175
166
189
188
144
126
178
187
55
20
40
60
80
100
120
140
160
180
200
Risk environment / Risk outlook
Sovereign Risk Ratings
S&P
Fitch
Moody’s
Suspended
Suspended
Not rated
Libya’s ratings by Standard & Poor’s (S&P) and Fitch Ratings remain suspended.
Libya is not rated by Moody’s Investors Service.
Diversity of
the Economy
Banking
Sector
Continuity
of Economic
Policy
GDP Growth
Poor and
Highly
damaged during dependent on oil
civil war
and gas
Underdeveloped
Broken down
since civil war
Negative
Infrastructure
Key Balances
Foreign
Investment
Socioeconomic
Development
Forex
Reserves
Substantial twin
deficits
Low
Medium to high
Substantial, but
falling fast
Stock Market
Listed Companies
Liquidity
Market Cap
Dominant Sector
Daily Trading
Volume
Libyan Stock Market
10
Very low
N/a
Financial Sector
N/a
Capital Market
Development
Liquidity
Maturity Range
Municipal Bonds
Corporate Bonds
No
N/a
N/a
N/a
No
No
Macro-economic overview
Note: The situation in Libya is extremely volatile at present, the civil war that began in earnest in mid-July 2014 continues. Given the highly volatile
nature of the situation in Libya and the scarcity of reliable statistics, the forecasts in this snapshot and the assumptions they are based on could
change abruptly.
In 2014, the security situation in Libya deteriorated substantially and trend lines remain negative. The country’s two rival governments, the General National
Congress (GNC) government, elected in 2012 and based in Tripoli, and the House of Representative (HoR), elected in June 2014 and based in Tobruk, remain
at loggerheads, which opens the door for general lawlessness and skirmishes between several rival camps. The critical issue in Libya as of writing was the
success of peace talks brokered by the United Nations (UN). If these talks fail, we do not see how the conflict can end except through military victory by one
side or another, which would see even more devastation and probably the involvement of regional states by proxy: Egypt on the HoR’s side and Sudan on the
GNC’s. If the talks succeed then the most serious conflict will end, but serious capacity problems will persist for some time, as will the terror threat.
A recent video of Islamic State (IS) militants executing 28 Ethiopian Christians in Libya makes little difference to political risk, but it does underline the
cruelty of the group and the way in which Libya’s civil war allows it to operate in that country. Videos very similar to this one, which showed the executions
of Western hostages in Iraq, prompted the US to launch air strikes against IS in Iraq, and a February video drew an immediate response from Egypt in the form
of air strikes on IS positions in two Libyan towns. It is possible that the recent video may contribute to an international mood in which interventions in Libya
become more regular. The key variable to watch is the success of the EU negotiations, but if they fail, we think an international intervention involving new
actors, especially Egypt, will become a likely outcome.
Oil production has been extremely volatile in recent years. Protests at the country’s hydrocarbon facilities resulted in crude oil production slowing to an
average of around 922,000 bpd during 2013. As a result, the country registered a 9.8% contraction in real GDP that year. The situation could have been worse
had it not been for the price of Brent crude remaining historically high at an average of $109.60/bbl. Conversely, in 2014 the hydrocarbons sector was faced
with a halving in average output for the year, coupled with the price of Brent crude falling from over $115/bbl in June to $55/bbl by the end of the year. On the
whole, the average price of Brent crude for the year was still relatively healthy at $99.40/bbl, but falling oil proceeds and further deterioration in the security
situation resulted in GDP growth plunging. Our econometric model suggests that Libya’s economy contracted by 30.2% last year, though we expect GDP
growth to average 19.3% p.a. during the 2016-18 period provided the country returns to relative stability. Having said that, the country is a war zone at
present, which makes economic forecasting nearly impossible.
2
Economic Structure as % of GDP
2014 Estimate
Source: NKC Research
Agriculture/
GDP
3.4%
Service/GDP
26.9%
Industry/GDP
69.7%
The Libyan economy relies almost exclusively on the hydrocarbon sector, seeing as it historically accounts for more than 60% of GDP, 90% of fiscal revenues
and 95% of export earnings, though following the outbreak of civil war, oil production has been extremely erratic. In total, we estimate that industry
contributed 69.7% to annual GDP during 2014. Services accounted for around 26.9% of GDP in the same year, while the agricultural sector’s contribution was
negligible.
Real GDP Growth & Net FDI/GDP
40.0
1.5
112.5%
20.0
1.0
0.0
0.5
-20.0
0.0
-40.0
-0.5
-60.0
-1.0
Source: NKC Research
-80.0
-1.5
2009 2010 2011 2012 2013 2014E 2015F 2016F
GDP Growth (y-o-y, %) (lhs)
Net FDI/GDP (rhs)
Libya has attracted a substantial amount of foreign direct investment (FDI) since 2005 after sanctions against the country were lifted, and as its natural
resources make it an attractive option for investors. The Qadhafi regime also opened up the economy gradually, announcing investment opportunities in
various sectors. The government started to give incentives for investing in the country, including tax exemptions and the ability to transfer profits abroad. The
business environment remained very challenging, though, and corruption was widespread. Still, between 2005 and 2010, FDI inflows averaged $2.6bn p.a.
However, the story changed when the country was dumped into a state of civil war in 2011. The intensification of violence and disruptions in the hydrocarbons
sector as well as the recent stark drop in international oil prices have resulted in companies scaling down investment, especially with regard to oil exploration
in Libya. In turn, outward FDI, through its substantial sovereign wealth fund, has fallen markedly after the turmoil started in 2011.
Exports ($ bn)
Imports ($ bn)
2014E
2015F
2016F
Petroleum products
Machinery
Electrical, electronic equipment
Cereals
Non-hydrocarbons
Other hydrocarbons
0.0
5.0 10.0 15.0 20.0 25.0 30.0
2016F
12.54
7.75
6.05
Machinery
7.79
7.41
7.59
Electrical, electronic equipment
5.46
5.09
5.03
3.46
3.37
Cereals
Crude oil
2014E 2015F
Petroleum products
Main Exports: % share of total
Natural gas
Source: NKC Research
Main Imports: % share of total
2014E 2015F
3.12
2016F
Crude oil
76.34
73.29
80.43
Natural gas
11.19
12.88
10.09
Non-hydrocarbons
6.52
7.47
5.17
Other hydrocarbons
5.95
6.36
4.30
On the whole, crude oil production averaged about 473,000 bpd during 2014, almost half of the average rate achieved during 2013. At the same time, the price
of Brent crude oil dropped spectacularly during the latter half of 2014. The price of Brent crude averaged $99.40/bbl during 2014, down from an average of
$109.60/bbl during 2013. As a result of the steep drop in output and lower oil prices we estimate that Libya’s crude oil export proceeds fell from $35.9bn in
2013 to $16.3bn in 2014. Although the average price of crude during 2014 remained high by historical standards, we expect a markedly different story over
the medium term, which will weigh on Libya’s export proceeds regardless of whether the country’s production levels rebound.
Outside of the hydrocarbons industry, economic activity in Libya is very limited. As such, it depends on imports for most of its non-energy domestic needs.
With export earnings having risen substantially since 2004, Libya’s ability to import also improved, contributing to a sharp increase in the import bill in recent
years. Between 2004 and 2010, imports rose by an annual average of 19.2% to almost $24.6bn. As the country fluctuated with various degrees of unrest over
the past few years the government and its finances have come under considerable strain. Nevertheless, since the country cannot feed itself from the local
agricultural sector, the need for food imports has remained high. After reporting considerable trade surpluses for many years, fuelled by the country’s
hydrocarbon riches, Libya’s trade balance is estimated to have slipped into deficit territory last year. Given the extremely volatile political situation in the
country, leading to frequent disruptions in oil production, and the downbeat outlook for the international oil price, we expect the country’s trade balance will
remain in the deficit until 2016.
3
Current Account & Budget Balance
(% of GDP)
40.0
40.0
20.0
20.0
0.0
0.0
-20.0
-20.0
-40.0
-40.0
Source: NKC Research
-60.0
-60.0
2009 2010 2011 2012 2013 2014E 2015F 2016F
Current Account/GDP (lhs)
Budget Balance/GDP (rhs)
The uncharacteristic swing to a trade deficit is expected to filter through to the current account as well. The impact on the ratio to GDP will be even more
pronounced, given the substantial knock the country’s economic growth metrics have taken. As such, Libya’s current account deficit is estimated to have
caved to 27.8% of GDP in 2014 and we expect the deficit to widen further to 42.6% of GDP this year, before narrowing sharply over the medium term. The
same effects are visible in the government’s finances. Our current forecast sees the budget deficit narrowing marginally to about 27.3% of GDP this year as
expenditure is curtailed, before narrowing sharply to a shortfall of 5.1% of GDP next year and returning to surplus territory in 2017 as oil production and
international oil prices return to higher levels. These forecasts are based on the assumption that hostilities will start to temper gradually from 2015 onwards,
which will support a recovery in oil production. However, the situation remains uncertain and the current conflict might still continue, and intensify beyond
2015. Libya has sufficient foreign reserves to cushion it for a few more years until crude oil revenues return closer to pre-conflict levels, but if the war takes a
turn for the worse and access to these reserves is cut off, the country could come under substantially more stress.
Average CPI (% change, y-o-y)
18.0
16.0
Source: NKC Research
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2009
2010
2011
2012
2013 2014E 2015F 2016F
Monetary policy is based on keeping the exchange rate pegged to the SDR. This has provided the Libyan authorities with a strong monetary anchor and has
helped to keep price inflation low and stable during most years. The Libyan government also keeps consumer prices low by using price controls and subsidies
on various consumer goods. The price of petrol, also heavily subsidised, is only a fraction of the international market price. Although this keeps costs down for
consumers, it distorts price signals and results in a skewed allocation of resources. According to the latest available data, CPI inflation averaged 1.4% y-o-y
during the first nine months of 2014. We estimate that CPI inflation averaged 1.9% during the whole of 2014 and anticipate price pressures to intensify over
the forecast period.
CONTACT DETAILS
KPMG
NKC
NKC Independent Economists CC
Mongi Hambli
+216 71 194 344
Email [email protected]
12 Cecilia Street Paarl, 7646, South Africa
P O Box 3020, Paarl, 7620
Tel: +27(0)21 863-6200
Fax: +27(0)21 863-2728
Email: [email protected]
GPS coordinates
S33°45.379'
E018°58.015'
The foregoing information is for general use only. NKC does not guarantee its accuracy or completeness nor does NKC assume any liability for any loss which may result from the reliance by any person upon
such information or opinions.
© 2015 KPMG Africa Limited, a Cayman Islands company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
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