Baku, Azerbaijan, June 7
By Leman Zeynalova – Trend:
The $10 per barrel fall in global oil prices over the past couple of weeks will improve the terms of trade for major emerging markets (EM) oil importers, such as India, and will help to provide some relief for countries with weak balance of payments positions, such as Turkey and Lebanon, Trend reports with reference to the UK-based Capital Economics.
EM oil producers clearly lose out but, aside from Bahrain and Oman, it shouldn’t have major ramifications for their economies, reads a report from Capital Economics.
Having hovered at around $70-75pb since March, oil prices have fallen by over $10pb over the past couple of weeks as concerns about weak global growth and escalating trade tensions have caused investor sentiment to worsen, said the company.
Capital Economics believes that the direct impact of the fall in the price of oil arises from a shift in countries’ terms of trade and, therefore, on current account positions.
“There are big losses for the handful of EM oil producers. For every $10pb drop in oil, we estimate that current account balances would deteriorate by an average of 2-3 percent of GDP on an annual basis (and as much as 5 percent in Kuwait). The gains are more diffuse in oil importers – a larger number benefit from the fall in oil, but to a smaller degree. Current account balances would improve by 0.5-1.0 percent of GDP for every $10bp drop in oil prices,” reads the report.
The report shows that the impact on oil producers comes predominantly via a hit to government revenues.
“Most oil producing firms in these countries are state-owned and pay high marginal tax rates. With oil at around $60pb, Qatar, Russia and Kuwait will continue to run budget surpluses and fiscal policy is unlikely to adjust. Elsewhere, government budget deficits would widen. In the UAE, relatively low government debt and a large public sector savings mean that there would be little pressure on the authorities to tighten fiscal policy. Saudi Arabia is in a similar boat, although if oil prices stay around $60pb, austerity would probably come back on to the agenda,” said the UK-based company.
Fiscal policy will have to be tightened in those oil producers such as Oman, Bahrain, and Nigeria where external and fiscal balance sheets are in need of repair, the report says.
“Oil importers will benefit from the fall in energy prices although the boost to growth depends on whether they save or spend the windfall. One point to note is that some of the largest beneficiaries, such as Turkey, Lebanon, and Ukraine have weak balance of payments positions and would be likely to save the windfall. Finally, the fall in the price of oil will push fuel inflation down. EM fuel inflation has slowed from over 10 percent y/y in mid-2018 to just 1.0 percent y/y in April, and we estimate that if oil remains at $60pb until the end of the year it could fall to as low as -5 percent y/y. year,” the company believes.
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