Economists have been downgrading oil exporters’ risk scores in recent weeks, but there might be worse to come if spot prices and petro-currencies continue to fall.
The risks of investing in oil exporters has increased with spot crude prices slipping by around 40% from their mid-June highs, sending petro-currencies tumbling in the wake.
Falling oil prices are bad news for oil-driven economies. The Russian rouble, Nigerian naira and Malaysian ringgit have come under pressure these past weeks, along with the Venezuelan bolivar’s exchange controls.
Canada’s dollar and Norway’s krone have – as with others – been following the trend.
However, it’s not all a one-way play. The world’s biggest net importers, such as China, have seen a rise in their country risk survey scores this year, symbolizing increased sovereign safety.
Others, such as India and Indonesia, are utilizing the opportunity to reduce state fuel subsidies to improve their fiscal positions and are similarly more stable in Euromoney’s global rankings. These countries will benefit, too, from lower inflation.
Canada, Mexico, Denmark and the UK have more diversified economies, making them less exposed to the effects. Their risk scores reflect this.
Danske Bank economists taking part in Euromoney’s survey note that lower oil prices are good news for western consumers where heating and transport costs take up large amounts of the household budget, and positive overall for the global economy – but acknowledge it is a double-edged sword.
Norway, hitherto the world’s safest sovereign, is unlikely to see notable problems unless the crisis deepens.
It is stronger, politically, has extremely large fiscal and current-account surpluses to start with, and a huge sovereign wealth fund acting as a buffer in times of crisis, though its score will undoubtedly slip the longer the oil rout continues.
As Danske Bank’s chief analyst Allan von Mehren says: “At some point, the decline in prices could be so big that it causes financial distress in oil-exporting countries.”
Most at risk
Large oil producers, such as Russia, with undiversified economies and where political and other problematic factors prevail, are already seeing heightened risk that reflects their vulnerability.
Russia is facing a perfect storm of sanctions, falling oil prices and a currency in freefall since it was floated by the central bank to avoid further foreign-reserves depletion.
Its score has fallen sharply, taking the sovereign down 17 places and into the fourth of ECR’s five tiered categories equivalent to a B- to BB+ credit rating.
Russia has ample reserves, exceeding $400 billion, and the budget balance is cushioned somewhat from lower oil prices by the countervailing effect of the rouble’s slide.
Yet it seems inevitable now, with investment down, that Russia’s economy will contract in 2015.
Household disposable incomes will fall sharply as inflation and unemployment escalate, weighing on consumer spending. Rising dollar interest costs exacerbating debt rollover risks will burden the banks already managing depositor withdrawals.
Kazakhstan, itself an oil producer, will feel the force with other sovereigns in Russia’s backyard.
Elsewhere Venezuela – South America’s biggest oil producer, and already a high-risk option – has slipped further down Euromoney’s global rankings this year to 146th out of 186 countries.
Its trend decline is a long-running tragedy spurred by heterodox economic policies. A large fiscal deficit, falling output and sky-high inflation from printing money are delivering the recipe for default that lower oil prices will provide the catalyst for.
The situation is less dramatic, but nonetheless disconcerting, for Africa’s hydrocarbon producers, all of which are sliding in Euromoney’s survey.
They include Nigeria, down two places (to 86th), and Angola, also down two (to 91st), edging closer to tier-five status, Euromoney’s lowest risk category containing sovereigns most at risk of default.
Gabon, scoring a lowly 43.8 points out of 100, and shedding more than two points this year (in 45th spot), is another, alongside South Africa, which has seen its score slide.
Equatorial Guinea and the Republic of Congo were already high-risk options before suffering a similar fate – though invariably, as in other parts of the region, political risks are added features.
Conflict, instability, weak institutions and attacks on the oil infrastructure compound the uncertainty stemming from reduced oil revenue flows.
Shifting Gulf sands
Gulf state producers (similar to Norway), have ample sovereign wealth buffers to ride out the storm and often base their budgets on very conservative oil-price estimates to cushion the blow.
In theory this means being able to finance deficits quite easily for years without recourse to external borrowing.
That explains the reluctance to cut back on production at the latest Organization of the Petroleum Exporting Countries meeting, and why the United Arab Emirates’ risk score, for one, has held up accordingly.
Still, scores for Bahrain, Kuwait, Qatar and Oman are lower this year, and Saudi Arabia, which has fallen two places in the survey, to 33rd, is in danger of sliding into tier three, containing mostly sub-A category sovereigns.
Algeria, Egypt, Iran, Iraq, Libya, Syria and Yemen have also seen their scores slide since June, compounding the conflict-risk complicating the MENA region’s investment prospects.
Yet for every downside there’s an upside. Venezuela’s plight will necessitate a rush for cash and a restructuring of its PetroCaribe programme offering discounted oil supplies along the Caribbean.
The sale of debts accruing to Caracas from the Dominican Republic, Jamaica, Nicaragua and other countries would help to improve their financing profiles, which could see the Caribbean become safer bets.
This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.