Poorer oil-producing countries in strife

Press, 12 February 1986, Page 40

Poorer oil-producing countries in strife

Reprinted from “The Economist,” London Rigging the oil market looks ever less likely. Talk of nevz OPEC production ceilings (17M-IBM barrels a day?) is empty given December’s decision to abandon the long ignored 16M barrels a day limit in favour of an unspecified “fair share of the market.” Nor will much help come from non-OPEC producers: Britain, pumping oil at around 2.5 M barrels a day for whatever price the market offers, says it will not curb output to prop prices. OPEC is nearly friendless. The prospect of tumbling oil prices is even more welcome in most of

the world’s poor debt-bur-dened countries than in its rich, industrial ones. Only for those few nations that are both poor and oil exporters is oil at less than $2O a barrel really troublesome. It is they that pose the danger for a world’s financial system stil fragile enough to be shaken badly by one or two big defaults. Mexico, which owes its rich-country creditors $978, poses the greatest risk. In 1985, 70 per cent of its foreign exchange earnings came from oil. The country has struggled to balance its books since July, 1985, when it had to drop the price of its oil temporarily to $24 a barrel. Two years ago, its Government economists said that a price of less than $25 would cause Mexico’s debt-repayment programme to fold. Now, two years of unexpectedly high interest rates and one earthquake later, its oil is worth around $lB a barrel. Suppose the oil fetches $2O for the rest of 1986. Mexico will lose around $3.68 in oil revenues by the end of the year (compared with what .it would have earned if the price had stuck at last year’s average of $27). If the price falls further, to $l5, the loss will amount to $6.28. If it dropped as low as $lO, the loss would be SB.BB. All this assumes that Mexico does not lose market share to other desperate oil States. The consolation for debt-ridden oil exporters is that the benefits of cheap oil in the rest of the world will soften the blow. First, cheaper oil will mean faster economic growth in rich countries: on rough-and-ready reckoning, a drop of $lO a

barrel in the oil price boosts GDP by an average of half to one per cent. That will mean higher demand for non-oil exports. Second, cheaper oil means lower inflation: on similarly intrepid reckoning, $lO off the oil price cuts average inflation in OECD countries, by 1 to 1(4 per cent in a full year. That, in turn, ought to allow interest rates to fall by roughly the same percentage, reducing the cost of servicing debt. If the oil price is $2O, and interest rates fall by 1 per cent as a result, that will give back to Mexico about SIB of the $3.68 “lost” oil money. Small comfort. Before the latest oil-price slide, Mexican officials reckoned they would need another S4B of new money to tide them over this year. Now they may need twice as much. The country’s reserves of foreign exchange have fallen so low that the Government has stopped releasing figures. Other oil-exporting debtor countries, particularly Egypt, Indonesia and Peru, are in trouble, too. But none owes as much as Mexico, and all should find their debts slightly easier to service, if oil stayed at $2O a barrel. At the other extreme, Venezuela and Nigeria face an even bigger revenue shortfall this year than Mexico. Paradoxically, this is in part because their debts are

smaller so they get less of a refund when interest rates fall. If the price of oil stays at even $2O, Nigeria’s foreign-exchange reserves will run out within weeks, though its Government might be able to delay the crunch by increasing production. Venezuela’s might defer the worst as well, even though of all the countries in the chart it loses the most revenue. It has foreign-exchange reserves of SI6B, more than any other Latin American country. The Government hopes to sign a debt-rescheduling agreement next month as planned. Only one developing country owes more to foreigners than Mexico. This is Brazil. It tops the list of poor-country beneficiaries of cheaper oil. A price of $2O a barrel would save it $2.7B Z altogether; $1.78 oil costs, plus SIB in interest charges. The total is equivalent to one-fifth of Mexico’s 1985 import bill. The lower the oil price, the bigger the saving. South Korea will gain nearly as much from cheaper oil in dollar terms as Brazil. But because it imports more than twice as much as Brazil, its saving is proportionately smaller — 7.1 per cent of the import bill, assuming an oil price of $2O a barrel. Greece, Turkey and India would also save more than SIB a year.

Oil importers, like oil exporters, will benefit from growth in world

trade. Almost everywhere, extra demand from nonOPEC countries will more than match the drop in demand from oil exporters. Turkey only looks an exception: a third of its exports go to OPEC countries, but these are mostly bartered, to Iran and Iraq. If the poor countries as a group find that the benefits of cheaper oil outweigh the losses, why should rich countries worry? Answer: making one country better off by S2B and another worse off by SIB is not automatically a good thing if the second defaults on its debts as a result. — Copyright.