With the fall in the price of oil to under US$30 a barrel, two oil exporting economies in particular have been adversely affected – Nigeria and Russia.
- Oil accounts for 10% of GDP but 70% of government revenue and almost all of Nigeria’s foreign earnings.
- Government revenue has fallen by 30% from this time last year
- Foreign reserves are down by $9 billion in 18 months
- Growth rate for 2015 was 3% which was down from 6% in 2014
- Nigerian bank loans are exposed to ups and downs of the oil market. At present about 24% of Nigerian bank loans are to oil and gas producers and struggling power companies. This exposure could lead to a banking crisis in Nigeria.
How is Nigeria tackling the problem?
The Economist outlined 3 responses to the crisis of which the first is the only realistic measure:
- An expansionary fiscal policy to stimulate aggregate demand
- Protect its hard currency reserves by blocking imports
- Try to crack down on inflation by keeping the naira pegged at 197-199 to the US$.
Nigeria is fortunate to have low levels of public debt – 19% GDP – but it is not helped by high interest rates but high interest rates means that 35% of government revenue is taken up by servicing its debt. Lower oil prices would be the catalyst to a serious debt problem.
Russia’s exports and government revenue are heavily dependent on the price of oil. Since the oil peak in June 2014 GDP has shrunk by approximately by 4%. The Russian budget assumes an average oil price of $50 a barrel, which was to have produced a deficit of 3% of GDP. However the budget deficit rises by roughly 1% of GDP for every $5 drop in the oil price and with the current oil price around $30 a barrel the deficit would probably rise to 7% of GDP.
If the economy does start to run out of cash the option of printing money may be tempting. But with inflation at around 13% this would further fuel inflation and also mean a further weakening of the rouble which wold make Russian imports more expensive for firms and households. Russian economic data does not look healthy:
- real wages fell by 9% in 2015 and 4% in 2014
- GDP per person was $8,000 in 2015 in contrast to $15,000 in 2013
- 2 million fell into poverty on 2015
- the share of families that lack funds for food and clothing rose from 22% to 39%
- retail sales have dropped by 13% last year
The 25% fall in the inflation adjusted exchange rate in the past year brought with the opportunity to diverse away from oil. The weaker double makes exports more competitive and now that labour is cheaper in Russia than in China there is great opportunity. However, it is not going to come from foreign investors as foreign investment has fallen from $40 billion in early 2013 to $3 billion in June quarter of 2015.