Dramatic oil price developments have led Credendo Group to review the medium- to long-term political risk classifications for net oil exporters. The fact that prices are likely to remain at low levels for an extended period is harming the outlook for most net oil exporters. Because of their reliance on hydrocarbons, these countries have been negatively hit by the new low-for-long oil price conditions, from their budget revenues to export receipts, and hence the country’s public finances and external balance.
In general, countries that are highly reliant on oil (as a source of public revenues and current account receipts) are hit hard by the sharp drop in oil prices. However, some countries are better prepared to cope with lower oil prices than others as in the past they have benefited from high commodity prices to lower their domestic and external imbalances or to accumulate large foreign assets, whereas other countries have seen their imbalances grow.
- Azerbaijan: MLT political risk downgraded from 4 to 5
Azerbaijan is heavily dependent on oil revenues and, to a lesser extent, on gas. Thanks to the development of the hydrocarbon sector, the economic situation improved steadily between 2002 and 2014. However, the high reliance on oil is also the reason why the country has now been hit hard by the sharp drop in oil prices. Azerbaijan’s external buffers are decreasing very rapidly. As a result, Azerbaijan stopped its currency support in December 2015 in order to stem the depletion of foreign exchange reserves, introduced (soft) capital controls in January 2016 and called the IMF to the rescue at the end of January 2016. Given the rapid depletion of external buffers and as oil prices are likely to remain low for an extended period, Credendo Group has downgraded the MLT political risk to category 5.
- Bahrain: MLT political risk downgraded from 3 to 5
Despite the greater economic diversification in comparison with its GCC peers, Bahrain is still highly reliant on energy revenues. After the oil price drop, economic activity slowed in 2015, the fiscal deficit tripled to -15% of GDP and the first current account deficit in more than a decade was reported. As a result, public and external debt increased substantially while foreign exchange reserves declined by almost 30%. The lower oil prices are also having a negative effect on the political situation. Indeed, the government, which is 90% dependent on oil revenues, may face difficulties in easing popular discontent through economic hand-outs and there is lingering unrest since the protests of 2011 were violently put down. As the downward economic trend is likely to continue in the medium term since oil prices are expected to remain low for a long period, Credendo Group has downgraded the MLT political risk to category 5.
- Ecuador: MLT political risk downgraded from 5 to 6
In Ecuador, low international oil prices have exacerbated existing fiscal and external weaknesses. 2014 and 2015 saw budget shortfalls of more than 5% of GDP, so public financing needs are large. Full dollarisation of the Ecuadorian economy implies that government deficits cannot be monetised, however, and access to international capital markets remains fragile in the aftermath of the voluntary sovereign debt default of 2008. That leaves fiscal consolidation, even though its implementation may prove complicated in the run-up to the 2017 general election (in which long-standing and still-popular President Correa will not run for re-election). Considering external dynamics, Ecuador’s growing current account deficit and stagnating economic activity (2015 saw a recession and GDP is expected to grow by only 0.1% in 2016 and 0.6% in 2017) have contributed to rising external debt ratios. Besides, with already limited international reserves, smaller than expected FDI and capital inflows would imply a liquidity crunch, which could in turn inspire the government to impose import or capital controls. In this context, Credendo Group has downgraded Ecuador’s MLT political risk classification to category 6.
- Gabon: MLT political classification confirmed in category 5
Oil production is declining gradually and Gabon has also been affected by the sharp drop in oil prices. Nonetheless, Gabon’s starting point appeared relatively resilient as it is one of the wealthiest countries on the continent with a very small population, access to international financial markets and significant growth potential (manganese, palm oil, rubber). A growth rebound from 3.2% in 2016 to 5% in 2017 is projected and its CFA franc zone membership serves as an important transfer risk moderator. The current account and fiscal balances have turned into deficits after years of surpluses and therefore external and public indebtedness is also on the rise. Even though Gabon’s financial position remains manageable so far, important economic reforms and fiscal adjustments are required to further diversify the economy and deal with the reality of low commodity prices.
- Kazakhstan: MLT political risk downgraded from 5 to 6
Being highly reliant on oil exports, Kazakhstan has been hit hard by the sharp drop in oil prices. Indeed, its current account balance turned into a deficit in 2015 and is expected to remain in deficit in the forthcoming years. External debt increased further to a very high level in 2015 and is expected to continue on an upward trend. More worrying, the debt service to current account receipts ratio has reached an alarming level and is expected to increase further in 2016 as current account receipts are severely hit by the drop in oil prices. As a result, the financial risk is elevated. However, the financial risk is somewhat mitigated by Kazakhstan’s external assets (National Fund of the Republic of Kazakhstan) and a large share of the external debt consisting of intercompany loans. Taking these mitigating factors into account, Credendo Group has downgraded Kazakhstan’s MLT political risk to category 6. Public finances are expected to worsen given the high reliance on oil prices but remain sustainable.
- Malaysia: MLT political risk downgraded from 2 to 3
Malaysia’s strong fundamentals have been weakened by their vulnerability to exogenous shocks, namely plummeted oil and gas prices, a structurally slowing top trade partner (China) and weaker foreign demand. These could last for some time and expose the export-led country to further deterioration. The ballooning of private external debt is particularly worrying even though its majority ringgit-denominated share mitigates debt repayments with a much depreciated ringgit. However, the external debt is big enough to further expose Malaysia to international capital volatility and domestic financial instability, especially in a context of rare political crisis, and thus be a drag on medium- to long-term growth. In a gloomier global environment, all those developments have led Credendo Group to downgrade Malaysia’s MLT political risk from category 2 to 3.
- Mexico: MLT political classification confirmed at category 3
With oil until recently making up more than 30% of Mexican fiscal revenues, it is obvious that the sharp drop in oil prices since mid-2014 has negatively affected public finances. All in all, however, prudent macroeconomic management and the beneficial non-oil revenue effects of a recent tax reform have made for an improving primary balance. As for external dynamics, it is crucial to see that while Mexico produces a lot of oil, it does not depend on exporting it. Indeed, the hydrocarbon trade balance turned negative in 2015 and is not expected to reverse until the recent energy reform starts bearing fruit in terms of increased production. The oil price slump therefore has not had a major impact on Mexico’s current account balance, which has fluctuated around 2% of GDP since 2013 and is expected to continue doing so in the years ahead. Indeed, rather than low oil prices, the recent upward trend in external debt reflects exchange rate depreciation: the peso lost almost 15% against the US dollar in the course of 2015. Though this highlights a flip side to what are usually considered key Mexican strengths – openness to international trade and exchange rate flexibility – external debt ratios are likely to remain low, even under negative shocks. In this context, Credendo Group has maintained Mexico’s MLT political risk classification at category 3.
- Nigeria: MLT political risk downgrade from 5 to 6
The outlook for Nigeria continues to be challenged by low-for-long oil prices, the growing risk aversion of international investors and the growing need to issue more external debt. Despite deficient buffer savings, the government chose to spend its way out of the crisis by supporting growth through capital investments, rather than emulating austerity. Consequently, the budget is likely to remain profoundly negative over the coming years, while securing financial funds will be hard at times of high uncertainty and unorthodox policies (foreign exchange controls and import restrictions introduced in 2015). A near term rebound could be triggered by allowing the exchange rate to adjust to the worsened terms of trade and unwinding harmful capital controls. On the upside, following progress in the Nigerian offensive against Boko Haram since early 2015, medium- to long-term and short-term risk cover is allowed again in the less exposed northern states while Credendo Group remains off-cover for the major hotspots (the states of Borno, Yobe and Adamawa).
- Papua New Guinea: MLT political risk downgraded from 4 to 5
As a natural resource-rich country and despite a large LNG project started in 2014, Papua New Guinea’s exports, budget and foreign exchange reserves have been severely hit by the end of the super commodity cycle. The low-for-long price scenario makes the MLT outlook much less upbeat with an average GDP growth forecast at 3%, a persisting heavy budget deficit and fast-rising public debt (expected at 41% of GDP this year). A dominant risk factor comes from soaring external debt ratios due to massive private borrowing to finance LNG project-related inputs. They are nevertheless on the decline thanks to cash flows generated by LNG exports and should be halved by 2020. Still, external debt service will remain around a high 20% of export earnings in the coming years and be more complicated with strong USD and Fed US rate hikes. Moreover, it could constrain access to foreign exchange reserves – at a 10-year low and for which delays have increased for importers – until 2017 due to excess foreign exchange demand. On the back of deteriorated fundamentals and economic prospects, the MLT political risk has been downgraded from category 4 to 5.
- Qatar: MLT political risk downgraded from 3 to 4
Though Qatar still enjoys strong growth thanks to large public investment spending for the 2022 World Cup, the low hydrocarbon prices will affect the world’s largest global producer of liquefied natural gas in the medium term. The current account is expected to slip into deficit in 2016, the first deficit since 1998, while growth is expected to slow. The low hydrocarbon prices will also push the fiscal budget into deficit as of 2016, despite on-going fiscal measures. Though the country has a comfortable level of foreign exchange reserves (4.6 months of import cover) and a large sovereign wealth fund, foreign exchange reserves are declining, while external debt is relatively high. As a result of the weakening economic fundamentals and the prospects of an enduring hydrocarbon price slump, the MLT political risk has been downgraded to category 4.
- Uzbekistan: MLT political risk downgraded from 5 to 6
Since independence in 1991, Uzbekistan has chosen a development strategy anchored by a restrictive trade regime and extensive economic intervention. This strategy was supported by significant natural resource revenues. However, the recent sharp decline in oil prices and the Russian recession have hit the economy hard. So far, the macroeconomic fundamentals remain solid. Despite these rather favourable figures, Credendo Group has downgraded the MLT political risk to category 6 as the oil price collapse is likely to further erode external liquidity while foreign exchange reserves – excluding gold and the Fund for Reconstruction and Development, which are sizeable – are already extremely low. Moreover, there are exchange restrictions. As a result, payment delays are observed owing to delays by the central bank to convert domestic currency into foreign currency.