Even before this week’s collapse in crude prices, the hit to the global economy from coronavirus had forced the world’s leading oil-producing nations to slash spending and re-work their budgets. Now it has just got worse.
Brent crude dropped below $20 per barrel on Tuesday for the first time in 18 years, while other major benchmarks across the world also tumbled.
As a result, policymakers in countries that are dependent on petrodollars for their public finances are facing an acute crunch.
The Middle East
Producers across the Middle East were already struggling with lacklustre growth before the crisis hit.
The region’s wealthier nations, such as Saudi Arabia, Qatar, Kuwait and the United Arab Emirates, have hefty financial reserves but even those countries are expected to be forced to cut spending and raise borrowing.
Saudi Arabia, the world’s biggest oil exporter, said last month it would reduce state spending by 5 per cent and was prepared to raise its debt ceiling from 30 per cent of gross domestic product to 50 per cent.
Consultants say government departments have been asked to rein in spending by as much as 20 per cent. As a consequence, Riyadh is expected to delay or halt government projects, including megaprojects that are central to Crown Prince Mohammed bin Salman’s plans to modernise the economy.
Qatar and Abu Dhabi have already tapped debt markets to boost their coffers, raising $10bn and $7bn respectively.
The challenges are far more acute for poorer producers such as Iraq, Algeria and Oman, which lack financial firepower and are likely to struggle to access capital markets.
Iraqi officials have warned that the government may not be able to pay half of its public sector salaries next month, while Algeria, where the budget balances at an oil price of $157 dollars a barrel according to the IMF, has said it will cut government spending by 30 per cent.
Algeria’s gross foreign reserves have plummeted from $96bn three years ago; the IMF projects they will fall to $36bn this year and $12.8bn in 2021. Iraq’s gross foreign reserves have fallen from $68bn last year to a projected $33bn this year and $10.6bn in 2021, according to the IMF.
Russia
Russia has been forced to drastically reduce its forecast for how long its fiscal reserves will last in propping up the budget.
Last month Moscow predicted its Rbs12.9tn ($170bn) rainy-day fund would fill the gap in its budget for about eight years. But this weekend, as oil prices continued to fall, it said the funds would last just half that.
Almost half of the money — built up over the past few years using a system that banked excess revenues when oil was above $42 a barrel — would be spent in 2020 alone, according to Anton Siluanov, Russia’s finance minister.
Editor’s note
The Financial Times is making key coronavirus coverage free to read to help everyone stay informed. Find the latest here.
Russian oil producers are partly insulated by the country’s floating rouble, which weakens as oil falls, increasing the domestic revenue per dollar earned on each exported barrel. But the rate of tax levied on producers also declines in line with prices, meaning that the federal budget loses out disproportionately.
Moscow’s budget relies on oil and gas sales for 40 per cent of its revenues and balances when Brent crude is about $40 a barrel, roughly double the current level. Earlier this month, government officials said that $35 oil would mean a deficit of $40bn this year.
“For the past 20 years, Russian authorities have been reminiscent of a drug addict with a gas pipe in one hand, oil in the other, and economic hallucinations in his head,” said Grigory Yavlinsky, a Russian economist and opposition politician.
“Our government, our leadership has all the necessary reserves to dampen the negative effects of [oil price] volatility on our economy,” Mr Putin’s spokesman Dmitry Peskov said on Tuesday. “Of course, if necessary, all these resources that are at hand will be used.”
Africa
Nigeria, the continent’s biggest oil producer, has already slashed its annual budget, moved toward quashing a costly petrol subsidy, devalued its currency and requested $7bn in emergency multilateral funding as it warned of an imminent recession — and that was when Brent was over $30 a barrel.
Crude generates more than half of government revenues and almost all of its foreign exchange.
“Our economy is in crisis,” finance minister Zainab Ahmed told local TV two weeks ago. She estimated that Africa’s largest economy could shrink by as much as 3.4 per cent this year without a massive stimulus plan.
That crisis is only likely to deepen now Brent has fallen further, said Nonso Obikili, director at the Abuja-based Turgot Centre for Economics.
“The big difference between $20 oil and $30 oil is that we might actually have to start shutting down wells,” said Mr Obikili. “In terms of the dynamics of fiscal and monetary policy it just aggravates what was already a dire situation.”
Other sub-Saharan African oil producers could fare even worse. The price crash puts crude exporters in a position of “extreme weakness” as they negotiate with lenders to cushion the economic blow, François Conradie of NKC African Economics said on Tuesday.
“The discussions between African governments and lenders, now and in the coming months, will have effects on government finances and African economies more broadly for decades,” he said.
Latin America
“Collapsing oil prices are the last thing Latin America needs,” said Oxford Economics in a recent report. “The last time oil prices fell to $30 per barrel, back in early 2016, Latin America entered a recession a few months later.”
Brazil’s state-controlled oil company, Petrobras, is one of the more robust players in the region, but Mexico’s Pemex was already one of the world’s most indebted oil companies with liabilities of $105bn. Two rating agencies have slashed its debt to junk status and analysts fear the cost of bailing it out could mean further downgrades to Mexico’s sovereign rating.
US sanctions and years of mismanagement at Venezuelan state oil company PDVSA had already contributed to a steep fall in output, but the latest price collapse has made it virtually impossible for Caracas to export crude at all.
Ecuador’s heavy dependence on oil revenues has already forced it to renegotiate its foreign debt; if oil prices stay low, analysts doubt the heavily indebted and dollarised economy can survive for long.
“Barring a successful [debt] restructuring, severe liquidity constraints and immense political costs associated with continued external debt service would likely lead to an eventual default,” said Eurasia Group.
Argentina, a serial defaulter, had pinned its hopes of boosting foreign currency earnings on developing huge shale deposits in Patagonia, but the project’s high production costs mean it is now unlikely to attract the billions of dollars in annual investment needed to exploit its full potential.
Reporting by Andrew England, Henry Foy, Neil Munshi and Michael Stott
Source: Economy - ft.com
