By Andrew Bauer and David Mihalyi[1]
Countries that are net exporters of oil and gas will perhaps experience the biggest shock from the COVID-19 crisis. As of early April, Brent crude was trading at USD 30 per barrel and forecast to decline, a result of plummeting demand, a growth in supply and a lack of storage capacity. This represents the biggest single negative oil price shock in modern history.
Governments in resource-rich countries are following other countries in enacting fiscal and monetary stimulus packages. Policies adopted include tax cuts and subsidies to businesses, orders for banks to extend loans to certain businesses, lines of credit, cash transfers, deferred utilities payments, increased benefits and even free groceries to vulnerable groups.
How will the impact differ in oil-dependent states versus more diversified economies?
First, national experiences will depend on how well governments are prepared for a crisis. Brunei, Colombia, Kazakhstan, Kuwait, Malaysia, Norway, Qatar, Russia, Saudi Arabia, Trinidad and Tobago and the UAE have enough fiscal space to maintain public spending well into 2021 despite a collapse in government revenue, as suggested by CDS spreads on their sovereign debt, as well as net debt figures. Each has significant savings in sovereign wealth funds or relatively low public debt levels.
Several oil-dependent countries, however, entered the crisis following a borrowing binge. Angola, Cameroon, Chad, Republic of Congo, Ecuador, Equatorial Guinea and Gabon were among those who had approached the IMF before the crisis for program financing, meaning they already had difficulties financing fiscal spending at higher oil prices. Others, like Venezuela, ran out of fiscal space to provide stimulus years ago. In recent weeks, several oil-dependent governments were among the 85 that approached the IMF for emergency assistance, including Ecuador, Iran and Nigeria. None of these countries is likely to be able to effectively mitigate the impact of the crash through more borrowing or drawing down on savings.
Second, for many oil-dependent countries, the sharp drop in oil prices may lead to a disproportionately large fall in oil revenue. If prices remain low, some companies operating in countries where it is relatively expensive to produce oil (such as Angola, Brazil, Canada, Malaysia, Norway, Trinidad and Tobago, the United States and Venezuela), will cut investment or go bankrupt, leading to sustained lower output. In some places, oil production may never again reach pre-crisis levels due to technological “shut-ins.” Officials in many high-cost producer countries should expect a long-term decline in GDP rather than a temporary shock and therefore should not expect to “spend their way” out of the slump.
Third, governments of oil-dependent countries aiming to stimulate their economies through fiscal transfers to businesses face limited choices of where to allocate money. Economies such as Algeria, Angola, Azerbaijan, Libya, Saudi Arabia, Timor-Leste and Trinidad and Tobago are not diversified, meaning there are fewer businesses that, with financial support, could quickly generate jobs and keep the economy churning. Governments in oil-dependent countries may therefore need to direct stimulus packages toward vulnerable groups, such as the poor or jobless, rather than businesses.
What can be done, bearing in mind that each country faces its own challenges and no single policy would be applicable in every context?
- Consider the role of sovereign wealth funds and borrowing
As mentioned, some governments entered the crisis with significant fiscal space, thanks to large sovereign wealth fund savings or low debt levels. Fiscal responsibility during boom years is designed to provide the space to draw down savings or borrow during periods of crisis, such as now. Short- to medium-term borrowing may make sense now, especially with historically low interest rates available for those countries with access to credit. Governments may be wise to rely on models to determine how much fiscal space to use.
Countries without fiscal space will at the minimum need to negotiate a moratorium on servicing external public debt, including repayments of oil-backed loans, and seek emergency support from multilateral and bilateral donors. In some, overborrowing or poor fiscal management during the boom years will mean debt restructuring and a temporary loss of access to international financial markets.
- Resist the temptation to provide stimulus to the oil industry, whether through subsidies or tax cuts
There is a great deal of uncertainty around medium-term oil prices; some analysts suggest that they will not rebound for some time, while others say that the industry will contract quickly, leading to supply challenges and a swift price rebound next year. At the same time, public and private oil companies in several countries have been requesting large bailouts or tax relief. Government officials must consider the risks of “throwing good money after bad,” especially given the enduring climate challenge and the need to shift to renewable energies. Governments ought to resist hasty demands and properly evaluate (and model) the viability of projects at lower prices. If an oil company is facing insolvency, alternatives to a bailout can include seeking new investors or returning licenses to the state.
- Devalue currencies slowly (in some countries)
Lower oil prices mean far less foreign currency entering government coffers. This is already putting pressure on currencies. The implication is that countries like Ecuador, Iraq, Saudi Arabia and Timor-Leste and the CEMAC monetary union (including Chad, Gabon and Republic of Congo), which have dollarized or pegged their currencies to the U.S. dollar or the euro, will need to draw down on their foreign reserves or sovereign wealth fund savings or borrow foreign currency to maintain their pegs. Some countries, especially in the Persian Gulf, have the foreign savings to withstand years of low oil prices. But others may need to choose whether to maintain their pegs, essentially subsidizing imports using their national savings. Or they may choose to devalue their currencies, leading to higher prices for imported goods, especially basics such as food, processed fuel and medications. In general, it is better to slowly depreciate rather than suddenly devalue under duress, generating another detrimental shock for consumers and many businesses.
- Revive economic development and diversification plans
Authorities in oil-rich countries may want to use this “pause” to plan ahead, especially those that are historically poor at long-term investments in infrastructure and education. Governments could use this opportunity to improve their medium-term development plans, focusing on energy transitions and economic diversification. One small example is Trinidad and Tobago’s plan for a USD 7.5 million grant facility for Tobago hoteliers to upgrade their hotel rooms. If unemployment stays high into 2021, as is likely in many countries, governments could use the excess labor to (re)build critical infrastructure—such as high-speed internet, water and sanitation and public transport—to improve competitiveness and quality of life over the long run.
A version of this blog was originally posted at the NRGI website.
This article is part of a series related to the Coronavirus Crisis. All of our articles covering the topic can be found on our PFM Blog Coronavirus Articles page.
[1] Natural Resource Governance Institute.
Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.
