OIL: UNDER PRESSURE
Bahrain, Angola, Ecuador and Venezuela rank as the emerging markets (EM) most vulnerable to a downgrade in their sovereign credit ratings if oil prices do not recover in 2015, Fitch Ratings said in a report published on Tuesday.
With benchmark Brent crude prices close to $80 a barrel, down from $115 a barrel in mid-June, the revenues of all oil producers are under pressure. But due to differing levels of fiscal reliance on oil income, the speed of deterioration in domestic budgetary conditions varies sharply among EM producers.
The blue bars in the chart below estimate the oil price at which each country manages to balance government revenues with spending, known as the fiscal breakeven point. The red squares on the chart plot the estimated 2014 budget surplus or deficit in each country, expressed as a percentage of GDP.
Thus, as the chart shows, Kuwait, with a budget surplus close to 25 per cent of GDP and a fiscal breakeven point of around $50 a barrel, is the most resilient to continued weakness in oil prices, according to Fitch.
Other territories such as Abu Dhabi and Norway, which like Kuwait produce a lot of oil per capita and therefore have to devote less of their oil revenues to meeting their people's needs, also enjoy considerable resilience to oil price declines. They have built up big budgetary buffers in recent years, reinforcing their position of strength.
At the other end of the spectrum, Bahrain's repeated budget deficits since 2009 has more than doubled its debt to GDP ratio, meaning that a significant chunk of oil revenues is required just to pay off the interest on domestic debts. Ecuador is in a similar position, after its oil receipts fell by 2 percentage points of GDP last year and its central government deficit surged.
The other measure of vulnerability is the extent to which a country relies on oil for its fiscal revenues, with Saudi Arabia, Bahrain, Abu Dhabi, Kuwait, Congo and Angola leading the way (see blue bars in the chart below). The red bars show the proportion of the current account inflows that derive from oil. A low ratio denotes a greater potential for a country – such as Mexico – to rely on non-oil exports when the oil price slumps.
Venezuela appears vulnerable on all counts – it has a relatively high fiscal breakeven point (of around $110 per barrel of crude), runs a fiscal deficit equal to close to 5 per cent of GDP, relies on oil revenues for around 40 per cent of its fiscal revenues and depends on oil exports for close to 95 per cent of its current account receipts. Fitch currently gives Venezuela a sovereign rating of B, with a negative outlook.
Fitch acknowledges difficulties in estimating Venezuela's fiscal breakeven point because it is not clear what exchange rate the government uses when converting oil-derived revenues, but a weighted average exchange rate using the economy's three foreign exchange systems results in an estimated breakeven price of $107 a barrel.
Nigeria is victim of oil price slump
In an example of how the oil price slide is having a market impact on the more vulnerable of countries, Nigeria has suffered a slump in the value of the naira against the US dollar in recent months, creating a policy dilemma for the Central Bank of Nigeria (CBN).
The naira's fall to NGN176 to the US dollar in mid-November, down from NGN162 to the US dollar in August, may not lead directly to an official devaluation by the central bank, says David Faulkner, economist at HSBC Securities in South Africa.
"Past episodes of currency stress suggest the Central Bank of Nigeria will try a combination of policies to stem depreciation and preclude devaluation of the official foreign exchange rate," Faulkner said.
"Since late-October, the CBN has introduced several administrative measures, albeit with little impact, and we expect continued intervention through its $37.5bn in foreign exchange reserves to try to stabilise the currency. We also expect the CBN to tighten policy through a higher cash reserve requirement on private deposits and/or a 50 basis point rate hike at its meeting on November 25."
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