Oil price collapse raises prospect of IMF bailout for oil producers like Nigeria, others

With the arrival of teams from the International Monetary Fund and World Bank in Azerbaijan this week, oil dependent economies across the developing world are facing the prospect of emergency bailouts after the collapse in the price of crude.

“These are bad times for oil producers and their creditors,” Oxford Economics warned in a note to clients this week.

It’s not just oil. As China’s resource-hungry economy slows commodity prices have slumped across the world. In its note Oxford Economics warned that it expected “widespread rating downgrades and further bad performance across commodity-producing sovereigns”.

If Azerbaijan is the first to receive a bailout from the IMF and World Bank, as expected, the question analysts are asking is who comes next. Here are some of the countries that top their list of concerns.

Nigeria

When Christine Lagarde, the IMF’s managing director, began the new year by visiting Nigeria she triggered an unintended conversation in the local media. Was she there to discuss an IMF bailout?

There is no doubt that Africa’s largest economy and its biggest oil producer is in a deepening crisis due to the fall in oil prices and to dwindling state coffers inherited from the previous government.

Oil revenues account for more than 90 per cent of Nigeria’s foreign exchange earnings and the current budget depends on a price of $38 a barrel. With international oil prices back above $30 a barrel that seems more sensible than it did a few weeks ago.

The government denied anything was afoot and so too did Ms Lagarde. “Given the determination and resilience displayed by the presidency and his team, I don’t see why an IMF program is going to be needed,” she told reporters after meeting President Muhammadu Buhari.

Mr Buhari’s new government remains determined to avoid an IMF bailout. Finance minister Kemi Adeosun said that the country was not considering a loan and did not need one. “We will work out our own issues and adjust on our own terms”, she said in an email.

But contingency planning is already under way. The government and the World Bank have opened discussions on some $2bn-$3bn in budget support, according to a senior diplomat in Abuja.

Ecuador

When Rafael Correa, Ecuador’s leftist president, moved in December to pay off a bond falling due, he was eager to make the most of a landmark moment. For the first time since Ecuador first defaulted on a bond 183 years ago the oil-rich Andean nation was paying off a foreign debt.

The move helped bolster investor confidence. But it also came against an ominous backdrop. As Mr Correa said at the time, the payment came “in a year when we have received zero in oil revenues”.

Things have only gotten worse since then. Ecuador is among the countries cited most often by analysts when asked who might end up with an IMF programme this year.

The reason is simple. As IMF staff laid out in an October paper, not only is Ecuador dependent on oil revenues but it also has a fully dollarised economy, meaning that its trade competitiveness is steadily being eroded as the dollar strengthens on the back of a recovery in the distant US.

Venezuela

Venezuela offers the most difficult political conundrum for anyone contemplating the possibility of a future bailout.

Former strongman Hugo Chávez built his rule on a narrative of socialist struggle against western imperialism and institutions like the IMF and World Bank. His successor, Nicolás Maduro, has done the same.

Loans from China have helped plug the gap left by falling oil prices. But the economy remains in dire straits and a likely default on its debts is looming. It’s no surprise that some see no option for Caracas but to eventually turn to the IMF, a move that would be complicated by the fact the fund has not conducted a formal review of the Venezuelan economy since 2004.

“Without a large IMF program [Venezuela would see] the largest output decline that you have seen in any country any time [recently],” says Ricardo Hausmann, a former Venezuelan planning minister who for months has been advocating an IMF program. “Venezuela is a catastrophe.”

Russia & Kazakhstan

Russia and Kazakhstan, the two largest former Soviet oil producers, have both been hit hard by the fall in prices. But both have substantial buffers that analysts say should protect them in the short term.

However, their situation could become more uncomfortable if oil prices remain low. Russia is set to exhaust the rainy day fund designed to cover budget deficits within about 18 months. It also has limited access to external debt markets due to western sanctions against it.

In both Russia and Kazakhstan, currency falls mean the state is likely to be called in to provide further support to the banking sector and potentially other large companies with large US dollar external debts. However, while Russian oil producers are generally still profitable at current prices, Kazakh producers are under greater pressure. KazMunaiGas Exploration Production, the listed subsidiary of the state oil company, says its main production unit needs an oil price of $65 to break even.

Brazil

With a deep recession that is expected to drag on through this year, a political crisis over a corruption scandal and a currency that lost almost a third of its value against the US dollar in 2015, Brazil faces an array of daunting challenges.

Brazil’s scandal-mired state oil producer, Petrobras, also has the ignominious honour of being the most indebted major oil company in the world. That has forced President Dilma Rousseff to start confronting publicly the possibility of her government having to bail out the oil company at what would be a huge cost to the public purse.

The good news is that there are signs things may be improving. The current account deficit is contracting and more help from China may be forthcoming.

Positive developments would certainly be welcome in Washington. Any IMF bailout of Brazil would be far larger than that offered to Greece, which is now by far the IMF’s biggest debtor. Moreover, the cost would likely have to be carried by the fund itself rather than shared, as has been the case with its recent rescue efforts in Europe.

Additional reporting by Jack Farchy in Moscow, Maggie Fick in Lagos and John-Paul Rathbone and Andres Schipani in Cartagena

 

FT