Kazakhstan’s long-standing leader calls it a “perfect storm”.
Venezuela’s government is shutting fuel stations across the country. Chad is paying its sovereign debts using cattle. Across the oil-rich states of Africa, the Middle East, Latin America and the former Soviet Union, leaders accustomed to a steady flow of petrodollars see trouble ahead as the oil price war promises to destabilise their economies – and perhaps their hold on power.
Of course, it’s not just oil-producing countries that are suffering a dramatic economic shock as the Covid-19 pandemic sweeps across the world, but for the world’s petrostates, the collapse in oil prices adds another layer of pain.
The plunge in export income is putting pressure on currencies and pushing up bond yields, just as the virus is ramping up the call for social spending.
“There’s no sugar coating. It’s going to be very difficult for producers,” said Russell Hardy, CEO of oil trader Vitol Group. “Except for a few countries with deep pockets, everyone is suffering. All oil-producing countries will have to trim budgets and may have to look at financing.”
The signs of economic malaise are everywhere. Oil and gas income for key producing countries will fall between 50% and 85% this year, to the lowest in more than two decades, if prices remain around current levels, according to International Energy Agency estimates.
On Tuesday, the International Monetary Fund (IMF) said a dozen countries in the Middle East and Central Asia have asked for financial support. Ecuador and Ghana have also requested emergency funds.
For the ruling cliques in oil-dependent countries there are few good policy responses.
Many failed to use the downturn in oil prices in the period between 2014 and 2016 to restructure their economies.
They now face the prospect of having to cut government spending just as they most need to bolster it, or abandoning support for their currencies – or both.
Saudi Arabia, for example, needs an oil price of more than $80 a barrel to balance its budget, higher than at almost any other time in the past 20 years. On Friday it raised its government debt ceiling from 30% to 50% of GDP amid plans to ramp up borrowing.
In Nigeria, per capita GDP was one third less in 2018 than it was in 2014.
In Iraq, the second-largest producer in the Middle East, the budget was based on an oil price of $56 a barrel and the government has said it may not be able to pay salaries and keep up food imports.
And in Kazakhstan, Nursultan Nazarbayev, who stood aside as president last year after ruling the Central Asian nation for more than a quarter of a century, last week compared the twin shock of the oil price plunge and the coronavirus pandemic to the collapse of the Soviet Union. “In terms of the difficulty of the challenges we must deal with, the current moment is to some extent comparable with the early 1990s when things for us were really tough,” he said. Kazakhstan initially hiked interest rates in an attempt to defend the currency before allowing it to slide.
Markets are already flashing warning signs. Investors have pulled $83 billion from emerging markets in two months, according to the IMF – the biggest outflow on record.
Many of the hardest hit are Saudi Arabia and Russia’s erstwhile partners in OPEC+, the organisation of 24 oil-producing nations led by these two countries.
Currencies from the Mexican peso to the Kazakh tenge have fallen more than 14% this month as Russia and Saudi Arabia launched an oil price war in the face of a sharp drop in global demand.
And yields on the government bonds of Angola, Nigeria and Iraq have soared to 30%, 12% and 14%, respectively, as investors fret about the possibility of restructuring and defaults.
“There are very few oil-producing emerging market economies that can handle a sustained oil price below $40 and not risk multiple credit downgrades,” says Maximilian Hess, head of political risk at AKE International.
On Thursday, S&P Global Ratings downgraded nine oil-producing countries including Saudi Arabia, Russia and Nigeria. Smaller oil producers like Chad, Equatorial Guinea, Republic of Congo and the semi-autonomous region of Iraqi Kurdistan are unlikely to be immune to the price swoon. Chad, Congo and the Kurdistan Regional Government all have sizable loans against oil supplies from trading houses like Glencore and Trafigura Group, which are likely to be harder to service in the new environment.
Chad has started repaying a sovereign debt to Angola in cattle.
Harvard University economist Carmen Reinhart called the combination of falling crude prices and the coronavirus pandemic the “kiss of death” for indebted oil producers, while Sanford C Bernstein & Co has warned that the oil slump risks a wave of defaults that could result in social unrest.
It wouldn’t be the first time that oil price wars had been the trigger for upheaval. Saudi Arabia’s decision in 1985 to open the floodgates and crash prices led to strains across the oil-producing world, contributing to the economic crisis that precipitated the collapse of the Soviet Union. And Saddam Hussein’s invasion of Kuwait in 1990 was, at least in part, retribution for its overproduction relative to its Organisation of Oil Producing Countries (OPEC) quota.
Analysts don’t see an imminent wave of revolutions in the current oil slump.
Hess at AKE International points out that the governments of most petrostates survived the 2014-2016 downturn intact.
Nonetheless, some are responding to the current price slump – which has already seen oil drop beneath the lows of January 2016 – with an authoritarian lurch.
In Azerbaijan, President Ilham Aliyev has promised to crack down on “enemies” and “traitors” in the opposition.
Ali Karimli, leader of the main opposition Popular Front of Azerbaijan Party, said in a statement on Facebook: “While the entire world has mobilised its resources to fight the coronavirus, the government in Azerbaijan is using the situation against its political rivals.” Under most pressure are Venezuela and Iran, two countries that are not only suffering from the drop in prices but also a sharp decline in exports as a result of US sanctions. In Venezuela, two-thirds of fuel stations in Caracas are now closed. In Iran, the black market value of the rial has plunged 30% since October. Both countries have requested aid from the IMF.
For the oil market, the key question may be what gives first: the debt-laden US shale producers or debt-laden emerging market governments.
“Cost of production counts for the US, but for OPEC nations it comes down to social cost more than production cost,” says Olivier Jakob, managing director of oil consultancy Petromatrix.
“OPEC can have short oil price wars but not long ones, because otherwise the social fabric disintegrates and puts the different regimes at risk,” he said. – Bloomberg