LOW OIL PRICES FOR LONGER: WHO IS AT RISK?
Who wins and who loses from low prices?
The negative impact on economic growth increases the longer oil prices remain below USD 45 per barrel. Oil-exporting economies will be particularly hard hit (see Figure 1), with Euler Hermes forecasting that Ecuador and Colombia will lose more than -1 pp of real GDP growth due to a USD 10 per barrel drop in oil prices. Mexico, Russia and the United Arab Emirates will lose more than -0.5 pp. The impact of lower oil prices on Saudi Arabia will be more limited, at around -0.2 pp for every USD 10 per barrel decline, due to higher export volumes and reserves, which largely offset the negative effects of reduced revenues and certain budget savings. Conversely, energy importers, especially eurozone countries, the US, India, China and Brazil, will benefit from lower oil prices, because this stimulates households' real purchasing power, although this effect may be partly weakened by households' propensity to save, which is significant in some of these countries, especially amid high uncertainty.
Lower oil prices also worsen fiscal balances and current account balances of major oil exporters: only Russia and the United Arab Emirates have an oil export break-even price of around USD 30 per barrel.
Risk of deficits and pressure on currencies
Nine major oil-exporting countries from the Persian Gulf region and the Commonwealth of Independent States have a fiscal break-even oil export price above USD 45 per barrel (see Figure 2). Only Russia and the United Arab Emirates are profitable at oil prices down to around USD 30 per barrel. For this reason, if oil prices remain below USD 45 per barrel for an extended period, especially Bahrain and Oman – which have already been recording large, twin deficits since the 2014 oil price decline – as well as Kazakhstan, may see their deficits rise to levels that could unsettle investors and trigger selling pressure on their currencies. Bahrain and Oman will likely receive financial support from other Gulf countries if needed to defend their currencies' peg to the USD, because wealthier neighbors will seek to avoid a domino effect that would also hit their own currency pegs to the USD.
Kazakhstan may once again be forced by markets into a significant devaluation, as happened in 2015. In that case, the domino effect could spread to Azerbaijan – which also saw a massive devaluation in 2015 – although it is now in a better starting position than then. In most Gulf countries and in Russia, the fiscal balance and external balance will remain under control over the next 12 months due to sufficient assets in their respective SWFs – sovereign wealth funds. Russia, however, may experience a 10-15% ruble depreciation as early as 2020 if the average oil price falls below USD 45 per barrel.
Bahrain, Oman and Kazakhstan – debt servicing problems
External financing needs
Total external financing needs are defined as the sum of the current account balance and maturing external debt over the next 12 months. In Bahrain, this sum amounts to 180% of all FX assets held by the central bank and the SWF (see Figure 3), meaning that authorities or companies may quickly encounter debt servicing problems if external financing becomes harder to obtain. In Oman and Kazakhstan, the corresponding ratios look more comfortable, at around 50%. It should be noted, however, that Kazakhstan's foreign assets include only USD 10 billion in official FX reserves and USD 61 billion held by its sovereign wealth fund. In the past, the country has been reluctant to use SWF assets to bail out its distressed banking sector. Therefore, there is also a risk that rolling over external debt will become difficult, especially for private-sector companies in Kazakhstan.
Figure 1. Impact of a persistent (after one year) USD 10 per barrel drop in oil prices on GDP growth
Source: Euler Hermes
Figure 2. Oil prices needed to balance the fiscal account and current account (USD per barrel)
Impact of falling oil prices on exporters and importers
Sources: IMF, Allianz Research
Figure 3. Total external financing needs (% of FX reserves and assets held by sovereign wealth funds)
Sources: IMF, Allianz Research
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AUTHORS OF THE ANALYSIS
ANA BOATA
Head of Macroeconomic Research at Euler Hermes
MANFRED STAMER
Senior Economist at Euler Hermes
Summary
Euler Hermes analysts point out that a sustained drop in oil prices below USD 45 per barrel will hit commodity exporters hardest, such as Ecuador, Colombia, Russia and the Persian Gulf countries, worsening their fiscal balances. Bahrain and Oman are particularly exposed, as their external financing needs may exceed their foreign exchange reserves, along with Kazakhstan, where the risk concerns the rollover of private companies' debt. Meanwhile, energy importers, including the eurozone, China and India, may feel a positive impact from lower prices thanks to an increase in households' real purchasing power.
