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EM Monitor - How major oil exporting countries react to falling oil price

July 2020

In the face of falling oil prices, which oil exporting countries are most at risk?

This month, Senior Economist Sabrina Khanniche looks at a set of 12 major net oil exporting economies to determine which are most vulnerable.

Oil prices lost 36 per cent in the first half of 20201, as the Covid-19 pandemic crushed demand for crude. Not only does this present a recessionary risk for major oil exporters, it also increases the risk of building a sizeable current account deficit.

The oil price vulnerability test

Our oil price vulnerability scorecard shows that Oman, Kazakhstan and Colombia are the most vulnerable countries of the group (see Fig. 1). An extended period of low prices would mean a higher current account and fiscal deficit, exerting downward pressure on their currencies. The most vulnerable, Oman, has had large twin deficits since 2014.

But not all countries are affected to the same extent. Russia and Saudi Arabia top our ranking as the least vulnerable economies.

High disparities among major oil exporters
Fig.1 - Pictet Asset Management oil price vulnerability scorecard
Fig.1 - Pictet Asset Management oil price vulnerability scorecard

Source: Pictet Asset Management, CEIC, Refinitiv, Bloomberg, BP; July 2020. 2020 data used for external breakeven price and current account based on forecasts by the International Institute of Forecasters (IIF).  *Data as of Q4 2018 for external debt. 

Oil breakeven price - Shedding light on a contrasted group

Oil exporters may be impacted differently by oil price fluctuations; how they react is largely driven by their external breakeven price - the oil price needed to cover a country's imports bill.

  • Low breakeven oil exporters: Iran, Kuwait, Qatar, Russia, Saudi Arabia, UAE
    Those countries maintain a high level of savings, as evidenced by the current account balance surplus used to buy foreign assets. Kuwait’s current account stood at 7 per cent of GDP in 20192 but is set to fall sharply in 2020, as can be seen in Fig.1 above. An external breakeven price below the current oil price gives room for the government to ease its fiscal policy or to see its currency appreciate. These countries account for 39.4 per cent of the world oil supplied by exporting countries3.
  • High breakeven oil exporters: Algeria, Angola, Colombia, Kazakhstan, Nigeria, Oman
    Those countries channel their oil proceeds into higher imports. In the absence of financial buffers, they are at risk of spending cuts or a currency depreciation, especially if the oil price falls below their external breakeven price. They account for 9.4 per cent of the world oil supplied by exporting countries4.

The global external breakeven price reached a peak in 2013 when the global oil price rose to $100/bbl (Fig.2).

All countries adjusted the external breakeven price down by cutting their imports bill, which led to the improvement of their current account balance from -1.1 per cent of GDP in 2015 to 4.8 per cent in 20185. The adjustment was more severe for high external breakeven oil exporters.

After a peak in 2013, countries brought their breakeven oil price down, mainly by cutting their imports bill
Fig.2 - External breakeven by oil exporter groups & Brent oil price evolution
Fig.2 - External breakeven by oil exporter groups & Brent oil price evolution

Source: Pictet Asset Management, CEIC, Refinitiv, Bloomberg, BP; July 2020.

Because of falling imports, the composite breakeven reached $55/bbl in 2018.

Today, high breakeven oil exporters are the most vulnerable to the fall in oil price. Their external breakeven already stood above the global oil price in 2019 and should rise even further in 2020 (Fig.3). The gap will be narrower for low breakeven exporters, whose position has still worsened compared to 2019.

High breakeven oil exporters are most at risk
Fig.3 - External breakeven by country vs Brent oil price
Fig.3 - External breakeven by country vs Brent oil price

Source: Pictet Asset Management, CEIC, Refinitiv, Bloomberg, BP; July 2020.

Overall, the global external breakeven price is set to exceed the global oil price. Colombia and Algeria (part of the high breakeven group) are vulnerable to the oil price decline while the UAE and Russia (traditionally with a low breakeven) appear the most resilient.

  

The recent oil price drop has negatively impacted major oil exporting economies. Yet, the group is not homogeneous, with some countries more resilient (e.g. Russia, Saudi Arabia) than others (e.g. Oman, Colombia, Kazakhstan). We can identify the most and least vulnerable countries by looking at a set of indicators (our proprietary oil price vulnerability scorecard).

The external breakeven price is a key indicator of those countries’ resilience to a fall in the oil price. As it is set to exceed the global oil price this year, pressure on high breakeven economies will intensify.