by Elliott Morss, Morss Global Finance
Introduction
We think of oil exporting countries as financially sound with significant international reserves. And this is certainly valid for most of the Middle East sheikhdoms. But there are other exporters where the oil price drop will have a major impact. Below, the economic impact of lower oil prices on the leading exporters is examined.
The Leading Exporters
The leading oil exporters are presented in Table 1 along with two measures of their economic significance to each country – their shares of exports and GDP. The high dependency of most of these countries on oil and the shaky political circumstances of Iraq, Libya, Nigeria, and Venezuela are troubling to say the least.
Table 1. – Leading Oil Exporters, Shares of
Total Exports/GDP, 2013
Source: UNCTAD
Fiscal Soundness of Oil Exporters
Evidence on how are the oil exporters are managing their finances is presented in Table 2. The government deficits (Col. 2) of Libya and Venezuela attest to the “train wreck” nature of fiscal management in those countries. How important are oil export taxes for these countries? Export duties and other taxes on oil exports vary widely, but assume the average rate is 20%. What that would mean for oil tax revenues appears in Col. 3. What if those revenues were cut in half? The resulting government deficits of these countries would increase by the amounts shown in Col. 4. Keep in mind that deficits of 5% or more become serious problems very quickly.
Table 2. – Fiscal Soundness of Oil Exporters
Sources: UNCTAD and IMF
International Accounts
Most oil exporters depend significantly on their oil exports for foreign exchange. And it often happens that robust oil exports strengthen their currencies. And those strong currencies make it difficult for them to have any other competitive exports.
The trade balances of the oil countries are presented in Table 3. In addition, the final column on the right indicates what happens to the balance if oil exports fall by 50% because of price cuts. Keep in mind that positive trade balances are important to all of these countries because they all have capital outflows.
Table 3. – Trade Balances, Oil Exporting Countries
Source: UNCTAD
International reserves are important to countries when trade balances go negative, and these data are presented in Table 4. The right hand column is a standard measure of international reserve adequacy – how many months of imports the reserves would pay for.
Table 4. – International Reserves of Leading Oil Exporters
Source: World Bank
Conclusions
Oil revenues are dangerous. They are frequently been referred to as “The Dutch Disease”. In today’s setting, the real question is how well the major oil exporters can manage a 50% drop in oil revenues. What the above tells us is that the problems of countries already in serious trouble (Libya and Venezuela) will intensify. Fiscal pressures on Algeria, Angola, Iraq and Canada will approach crisis levels. Both Iran and Russia will now have to cope with sanctions and lower oil prices. The remainder of the exporters will only have to “tighten up a bit”.
