MENA oil exporters resilience to oil price shocks

Transcription

1 MENA oil exporters resilience to oil price shocks Introduction Over the past months, global oil prices have been hit by a significant downward shock. While lower international oil prices reduce the import bill of energy importing countries, energy exporting countries in the Middle East and North Africa (MENA), which houses the world s largest conventional oil and gas reserves, see their incomes shrink. In this article, we will analyse the ability of MENA net oil and gas exporting countries to deal with negative oil price shocks in the short to medium term. Mid-October, Brent crude oil prices had fallen by more than USD 30 since their peak of USD 115 mid-june, hitting a near-four-year low. In the past months, the upward price effects of the escalation of severe security issues in Libya and Iraq and the conflict between Russia and Ukraine were outweighed by (so far) resilient oil production in Libya and Iraq, a strengthening dollar and weakerthan-expected worldwide economic performance. Meanwhile, US production of hydrocarbon products continues to grow, largely thanks to a boom in non-conventional oil and gas production. The current oil price shock comes after almost four years of historically high oil and (particularly in Asia) gas prices. The high prices benefitted net oil and gas exporting countries in the Middle East and North Africa, as they saw their exports and public revenues surge. For Iraq, Qatar, the United Arab Emirates (UAE), Kuwait, Saudi Arabia, Bahrain and Oman, the oil prices in the past years concurred with an increase in oil production, so these countries benefitted the most of the higher oil prices. For Algeria, Yemen, Libya and Iran, higher oil prices mitigated the effects of falling oil production volumes. Hence, between 2009 and 2013, MENA oil and gas exporting countries saw energy exports and public revenues almost double. On the one hand, this facilitated a strong growth of imports and public spending. But on the other hand, it also contributed to building large foreign assets. 1

2 This evolution went together with pressure for more redistribution of the countries oil wealth, as their populations demanded improved living conditions, encouraged by the revolutions that the Arab region witnessed in early As a result, these countries have become increasingly addicted to the high energy prices, rendering it difficult to adjust expenditure when oil prices (and thus export earnings and public revenues) fall. In-depth analysis of vulnerability indicators A downward oil price shock obviously impacts revenues for oil exporting countries, particularly if oil prices remain low for a sustained period, which is not yet necessarily the case today in fact, prices could even spike in case of a sudden disruption in global oil production. Exporters of natural gas can see their revenues affected by a drop in energy prices as well, despite some decoupling of global gas prices from oil prices over the past years. In this context, the question is to what extend the MENA s oil and gas exporting countries are vulnerable to the negative oil price shock. In this article, the resilience of these countries to such a downward shock will be assessed, based on a number of macroeconomic indicators. > Hydrocarbon dependency In first instance, the countries dependency on oil and gas (or hydrocarbon) revenues is assessed by calculating the share of hydrocarbon revenues in total export and public revenues. The more a country is dependent on oil and gas revenues, the higher its vulnerability to a negative price shock. Figure 2 ranks the countries from lower to higher dependency of exports on hydrocarbon revenues for 2013 (red bars). It shows that in 2013, except for Yemen, all countries relied on hydrocarbon revenues for more than half of their total export revenues. For Iraq, Libya, Algeria, Kuwait and Qatar, export revenues were the least diversified, with a dependency on hydrocarbon revenues that even exceeded 80% of total revenues. The same is true for public finances dependency on hydrocarbon revenues (yellow bars), particularly in Libya, Iraq, Saudi Arabia, Bahrain and Kuwait. In order to reduce this strong dependency in the longer run, it will be important that these countries (further) diversify their economies and export base. A country s dependency on high oil prices can also be derived from its external and fiscal breakeven oil price, as shown in figure 3. The external breakeven oil price is the oil exporting price for which a country s current account equals zero, in other words for which total goods and service import payments are perfectly balanced by total export revenues. Higher prices would thus result in a current account surplus, lower prices in a current account deficit. Similarly, the fiscal breakeven oil price is the price that would be required in order to register a balanced government budget. Libya and Yemen clearly have the highest breakeven oil prices, at much higher levels than recent (indicated by the grey line) and expected average oil prices for this year (indicated by the red line). As a result, both countries are currently recording large deficits. This also shows that Yemen s 2

3 relatively low dependency on hydrocarbon revenues we mentioned earlier is actually a sign that the country s falling oil production is insufficient to cover expenses, rather than a sign of successfully diversified revenues. Budget breakeven oil prices of Bahrain, Iran, Oman, Algeria and Iraq are also higher than the expected average oil price for this year, resulting in public deficits and revealing more vulnerability of public finances to negative price shocks in these countries. Externally, most countries benefit from somewhat lower breakeven oil prices, even though the external breakeven oil prices of Algeria and Iraq exceed the current low oil prices. > External debt For most countries, oil prices have remained above their breakeven oil prices over the past years. This has resulted in important surpluses, which were used to reduce public and external debt and/or build up large foreign assets. Most of MENA s oil exporters have very low gross external debt levels (below 20% of their GDP and exports, figure 4), revealing that their liabilities towards the rest of the world are limited and indicating a sound financial situation. Nevertheless, Yemen, the UAE, Bahrain and Qatar are notable exceptions, particularly in relation to their total exports. > External assets MENA oil and gas exporters have also used the high hydrocarbon revenues to build up foreign assets, mostly by increasing foreign exchange reserves and financing sovereign wealth funds (SWFs). These SWFs save and invest oil revenues with the aim of reducing the impact of volatility in revenues due to oil price shocks and of building up savings for future generations. So, when we take into account not only the countries external debt (as we did in figure 4), but also their external assets, the net foreign asset position shown in figure 5 reveals a somewhat different picture. Indeed, except for Iraq, the foreign assets of all countries exceed their foreign liabilities, making them net creditors to the world. But here too, big differences can be distinguished. Kuwait and Libya s net 3

4 external position is extremely strong, while the foreign assets of Bahrain, Yemen and Iran only narrowly exceed their foreign liabilities. The other countries net positions look healthy. But one needs to caution when assessing the net position of a country, because the maturity profile of its assets and liabilities can greatly differ. There is typically limited transparency about the assets and maturity profile of the SWFs in the region, which makes it difficult to assess whether the foreign assets can be made liquid (at a reasonable price) whenever current (mostly hydrocarbon) revenues are not sufficient to finance expenditures and imports or service debts. This is particularly a problem for those countries with relatively high gross external debt ratios: Qatar, Bahrain, the UAE and Yemen. A country s level of foreign exchange reserves gives an indication of the available liquidity in case of sudden shocks. Figure 6 ranks the countries according to their so-called import cover and shows that the foreign exchange reserves of Algeria, Saudi Arabia and Libya are sufficient to cover between 2 and 3 years of imports, which is high by all means. Other countries import cover is much lower, though still healthy and above 3 months of imports, a general benchmark for adequate liquidity. > Oil and gas reserves A final indicator that is useful to assess the resilience to a fall in energy prices is the level of oil and gas reserves. Countries with low oil and gas reserves face more urgent pressure to diversify their economy and export base and will proportionally suffer more from a period of lower prices for their scarce resource. Countries with higher reserves can (if they have sufficient spare capacity) more easily increase production volumes in order to compensate lower prices. However, such an increase in supply would further push prices down. This is a reason why the Organisation of the Petroleum Exporting Countries (OPEC) cartel limits production quotas for its members, which include all MENA oil exporters in this article except Oman, Bahrain and Yemen. A reduction of OPEC oil production quotas in response to falling oil prices would (if successful) put upward pressure on oil prices, but at the same time reduce export volumes and thus still impact export revenues. 4

5 In Figure 7, reserves are measured by comparing proved reserves to current yearly production. It shows that Bahrain s own oil and gas reserves are particularly low, though it should be noted that this is mitigated somewhat by the fact that the country also imports a large amount of crude oil (which it then refines and exports) from an offshore oil field which it shares with Saudi Arabia. But also in Oman and Algeria, oil reserves only cover about 20 more years of production at the 2013 production level. For other countries, reserves are still sufficient for at least 50 more years of current production. In the case of Iraq, Libya, and Iran, oil and gas reserves are even sufficient to continue production for more than a hundred years. The same is true for gas reserves in Kuwait, the UAE and Qatar. Resilience of MENA oil exporters in a nutshell In the longer run, many other factors will also play a role in determining MENA oil and gas exporting countries ability to deal with negative oil price shocks. Among them are the development (and cost price) of new extraction techniques, the future cost of oil production, the evolution of domestic energy consumption and political stability. Nevertheless, the macroeconomic indicators described above provide useful information to understand and compare these countries resilience to the current shock of oil prices. Indeed, significant differences can be distinguished in breakeven oil prices, oil and gas reserves and external debt and assets. By the measures described above, Yemen is clearly in the most vulnerable situation among the region s oil exporters. The country already needs an oil price of more than USD 160 pb in order to keep public finances in balance as it struggles with insufficient production and exports as a result from political instability and security problems. Moreover, its net foreign assets, though positive, only amount to about 16% of GDP and the import cover of its foreign exchange reserves is among the lowest in the region. Iraq, Iran and Bahrain also show significant vulnerability. They have not (yet) succeeded in building significant external foreign assets that would help them mitigate the impact of a sustained negative oil price shock, while budget breakeven oil prices are already higher than current oil prices. Moreover, these countries are very dependent on hydrocarbon revenues. For Bahrain this is particularly true on the fiscal front while this would also be the case for Iran if its oil exports were not so much hampered by international sanctions. While the sudden advances of IS in Iraq have not yet affected oil production significantly, they do raise questions over future developments in the country s hydrocarbon sector. For Algeria, Oman, Qatar and the UAE who have been able to build large net foreign assets (amounting between 75% and 115% of their GDP) the picture is mixed. Algeria s dependency on hydrocarbon revenues is among the highest in the region, as are its breakeven oil prices. Moreover, its oil reserves are limited, at around 20 years of current production. If the country does not succeed 5

6 in revamping its hydrocarbon sector or in diversifying its economy and exports base to other sectors, this will cause problems in the longer run. But in the short run, the country seems well prepared to deal with a drop in international prices, benefitting from extremely low debt and strong liquidity thanks to high foreign exchange reserves. The situation of Qatar and the UAE seems the opposite: though also dependent on hydrocarbon revenues, they benefit from low breakeven oil prices and from very high oil (UAE) and gas (both) reserves. But, they have to deal with relatively high external debt and their liquidity is much more modest than Algeria s, rendering them somewhat more vulnerable. Oman is close to the median for most indicators, though it faces stronger diversification pressures as its oil (16 years) and gas (31 years) reserves are rather limited while its fiscal breakeven oil price already exceeds USD 100. Saudi Arabia, by far the largest oil producer in the region and an important accommodator of world oil markets over the past years, seems in a good position to deal with the current price shock. Low debt and high foreign exchange reserves fence off pressures from a fall of oil prices, even though its fiscal breakeven oil price is above USD 95 pb. Moreover, the country s oil and gas reserves are sufficient for another 60 resp. 80 years of production at its currently high production levels. Measured by the indicators above, Kuwait is in the best position to weather a fall in oil prices. Even though it is dependent on hydrocarbon revenues for more than 80% of its total exports and public revenues, its breakeven oil prices are the lowest in the region and net foreign assets vis-à-vis GDP are the highest. Moreover, external debt amounts to less than 20% of GDP and oil and gas reserves are sufficient to continue current production for decades. The performance of Libya s oil and gas sector is strongly affected by the political instability of the country, making comparisons with other countries rather useless. Nevertheless, the country s low debt, strong liquidity and high oil and gas reserves continue to provide for important buffers against both these domestic (supply) and external (demand) shocks. Daan Rowies T d.rowies@credendogroup.com 6