As Opec and Russia are preparing to meet in Algiers to discuss the prospect for an output agreement, oil producers have been watching their fiscal revenues slump. Failure to agree would only prolong the macroeconomic crisis faced by some and the fiscal predicament of others. Supply and demand-side factors suggest that the oil price is likely to stay low for longer than initially thought. But at this point, it’s easier to address supply-side dynamics.
The collapse of the oil price has exposed the mismanagement and dysfunctions sustained during the boom years. On a large scale, the size and probable persistence of this external shock means that all oil exporters will have to further adjust by reducing spending and increasing revenue.
Venezuela’s economy is in perpetual crisis. Economic mismanagement and the low oil price have led to shortages of foods like corn and rice, which it once easily imported using the national oil company’s vast foreign currency revenues. Essential medicines such as antibiotics have disappeared. The economy is set to contract by 10 per cent by the end of the year and is already experiencing triple-digit inflation. The price of bread alone has doubled from month to month, now about 50 cents a loaf in many places, at a time when the oil workers here say they are making less than a dollar a day because of the inflation. The state oil company is hobbled by debt, two thirds of its exports go to paying off its lenders. The desperate condition of Venezuela’s state oil company has international oil traders concerned that its collapse could shock an otherwise oversupplied global market.
Africa’s most populous country, Nigeria, has gone from being one of the most promising to one of falling expectations. Last month, its vice president said the country’s economic crisis is the worst ever. The currency has lost close to 40 per cent of its value and output is set to shrink this year for the first time since 1991 after growth of 8 per cent through the 2000s. Inflation has soared to an 11-year high of 18 per cent as businesses scramble to pay foreign suppliers for machinery and raw materials that aren’t available locally. Earlier this month, S&P Global Ratings downgraded Nigeria five levels into junk territory, saying the economy has performed worse than it had expected. Nigeria’s oil production has accelerated over the past several weeks and could increase by 600,000 barrels per day by the end of the year.
Russia is grappling to transition from recession to stagnation. Data from August revealed an 8 per cent drop in household income compared with the same time last year. That comes as prices have moved steadily upwards, with inflation regularly hitting the double digits in recent years. The country’s rainy-day fund has shrunk to just US$32.2 billion this month, according to the Russian finance ministry. It was $91.7bn in September 2014, just before oil prices started to tumble. At the current rate, the fund would be depleted in mid-2017, perhaps a few months later, the Institute of International Finance wrote in a note this month. The central bank still has $395bn in international reserves, down from $524bn in October 2013. The bank burnt through more than $140bn in foreign currency reserves between 2014 and 2015 trying to defend the rouble’s value.
Although far from becoming another Venezuela, the oil-producing countries of the Middle East have seen their revenues fall fast, current and budget deficits rising. Last year, they lost more than $340bn in oil revenue from their budgets, amounting to 20 per cent of their combined GDP. As oil accounts for 85 per cent of revenues, GCC economies have been making fiscal adjustments and implementing non-oil revenue measures. However, revenue policies have to be paced over many years so they have the least effect on growth. Growth in the UAE and Qatar has slowed, although it remains positive with the non-oil sector contributing the most.
In contrast, Saudi Arabia’s growth this year would be derived from oil with the non-oil sector already contracting during the first quarter. To address the fiscal mismatch, since 2014, Saudi Arabia depleted close to $200bn of its foreign reserves.
Implementing successful policies that drive GCC economies away from oil is not an easy task. The UAE has been the most successful case of diversification in the region. If oil prices stay low, economic pain will persist for all, although some will be better off than others.
John Sfakianakis is the director of economic research at the Gulf Research Center in Riyadh.
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