Lower oil prices to strain net exporters, offer respite to importers

Lower oil prices will reverse the financial performance of oil exporters and importers in 2015, with exporters’ public finances coming under renewed pressure and importers given some help in reducing their deficits, Moody’s Investors Service says in a report published today. Moody’s report, entitled “Global Oil Price Shock: Challenges for Oil-Exporting Sovereigns, Breathing Space for Importers” is available on www.moodys.com.

The impact of cheaper energy means oil exporters face worsening fiscal and external balances, with some moving from twin surpluses to twin deficits. Oil importers will gain some breathing space to cut their budget deficits and use savings from lower energy costs to rebuild their financial buffers.

“Sustained lower oil prices will reverse fiscal and external metrics for oil exporters and importers,” says Steffen Dyck, a Moody’s Vice President and co-author of the report. “Between 2011 and 2014, high oil prices helped many net oil exporters to record fiscal and current account surpluses, while exporters suffered twin deficits. Cheaper energy means this picture will change in 2015.”

Moody’s examines the impact of sustained low oil prices — which fell by almost 60% between June 2014 and January 2015 – on four net oil-exporting countries and six net oil-importing sovereigns.

For oil-exporters, the scale of the impact of lower oil revenues varies from country to country. However, all of the sovereigns will have to adjust their spending and investment plans, subduing their economic growth outlook in 2015. Bahrain, Oman and Saudi Arabia are likely to see the biggest deterioration in both fiscal and external metrics this year, moving from large twin surpluses to twin deficits.

However, Saudi Arabia is likely to use its large foreign-exchange reserves to cushion the impact of cheaper oil on government revenues. Moody’s forecasts that Saudi Arabia’s government spending will exceed the budgeted amount by 10% this year. However, the oil price drop does not threaten Saudi Arabia’s credit profile for the foreseeable future.

Other exporters, including Azerbaijan, Bahrain and Oman, will face more severe adjustments to government spending, which typically rose when oil prices were high. For Russia, Moody’s expects the big fall in oil prices to push the net exporter further into recession and materially weaken its creditworthiness.

Net oil importers should see their budget deficits improve, helping them to improve confidence and their economic resilience. In Japan, the world’s third largest net importer of petroleum products, cheaper oil will benefit the country’s trade balance and raise real incomes. Every $1 drop in the price of a barrel of oil will lead to a $1 billion cut in Japan’s annual import bill. In the United Kingdom, a net oil importer, the most significant impact is likely to be felt through the boost to households’ real disposable income at a time of accelerating nominal wage growth. Moody’s also sees India benefitting from lower oil prices through lower inflation, an improved trade balance and reduced fuel subsidy costs.

Overall, Moody’s expects that exporters will feel the impact of cheaper energy quickly, while the benefits for importers will be more widespread and take longer to materialise.