‘A welcome respite for emerging markets’
Once again, Saudi Arabia has effectively abandoned its role as swing producer, sparking a price war that has the potential to inflict major costs if sustained for a prolonged period. This compounded the impact on oil markets of slowing demand amid a dip in global economic growth due to the coronavirus. The result was a March 9 plunge in oil prices - the largest one-day oil price decline since the 1991 Gulf War.
Saudi Arabia’s foreign reserves of more than $500 billion (R8.5 trillion) mean that the country has enough financial capacity to withstand oil prices in the range of $30 to $40 per barrel (bbl) for several quarters.
Russia likely has the greater ability to sustain lower oil prices, having substantially raised reserves in recent years, with $436bn in foreign exchange and zero net public debt, while conservative budget assumptions were made regarding both the oil price and exchange rate. However, the added geopolitical dimension to Russia’s behaviour, involving retaliation against US sanctions and, more generally, countering the rising market share of shale, adds to the uncertainty.
The Gulf Corporation Council countries will likely be most impacted. According to the IMF, they require an oil price of between $45 and $100/bbl to break even fiscally.
In Africa, Nigeria appears to be at greatest risk of currency devaluation in this environment.
Asia is of greatest significance. Most countries are net oil and gas importers. For giants such as India and China, lower oil prices will considerably support current accounts and currencies, while easing inflationary pressures, enabling supportive monetary policy. In addition, lower energy costs act as a direct stimulus to consumers and most businesses.
We view prolonged lower oil prices, driven by extended demand weakness and continued oversupply, as a tail risk. We expect global oil prices to hover around $30/bbl in the second and third quarters of this year, but believe they will likely move back up towards $40 to $50/bbl by the end of the year and thereafter could normalse in the $50 to $60/bbl range.
The negative near-term impact on energy companies, as well as the secondary effect on economic growth in oil-exporting countries, could be considerable. That said, the oil price crash in the last decade resulted in a sustained period of company (and fiscal) deleveraging, paired with improved cost control, as well as encouraging greater caution towards the sector.
Overall, however, the vast majority of emerging markets will benefit from the oil price collapse despite the near-term negative market reaction. In an environment of slowing economic growth due to the coronavirus, lower oil prices represent a substantial additional stimulus to the broader asset class, particularly within Asia.
Bassel Khatoun is managing director and director of portfolio management frontier and Middle East North Africa at Franklin Templeton Emerging Markets Equity.