Nigeria, Algeria, Chad, and Iraq will be among the first countries to experience political instability as oil producers feel the effects of a transition to low carbon energy production, according to a new report from global risk consultancy Verisk Maplecroft.
With the move away from fossil fuels set to accelerate over the next three to 20 years, and the COVID- pandemic eating into short-term gains in oil export revenues made in recent years, Maplecroft warned that oil-dependent countries failing to adapt risk sharp changes in credit risk, policy and regulation.
The firm cautioned that countries that had failed to diversify their economies away from fossil fuel exports faced a “slow-motion wave of political instability.”
“Our data pinpoints Iraq, Nigeria and Algeria as first in line to face a slowmotion tsunami of political instability over the next 3-20 years,” Verisk Maplecroft, a research firm specialising in global risk analytics said in its latest 2021 Political Risk Outlook.
Nigeria, Africa’s largest economy, relies on crude sales for around 90percent of its foreign exchange earnings and has devalued its naira currency twice since March last year. The International Monetary Fund (IMF) last month urged the country’s central bank to devalue once again, but met with resistance.
Verisk Maplecroft researchers suggested that recent currency devaluations were a “harbinger of the bleak options” ahead for oil-producing countries, who will have to either diversify or face forced economic adjustments.
“Many, if not a majority, of net oil producers are going to struggle with diversification largely because they lack the economic and legal institutions, infrastructure and human capital needed,” said Head of Market Risk James Smith.
Analysts suggested the worst-hit countries could enter “doom loops of shrinking hydrocarbon revenues, political turmoil, and failed attempts to revive flatlining non-oil sectors.”
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Since the oil price crash of 2014, most exporters have either stagnated or reversed efforts to diversify their economies, Maplecroft data highlighted, with many doubling down on production in the ensuing years in a bid to plug revenue holes.
“Despite this, the majority took a hit on their foreign exchange reserves anyway, including Saudi Arabia, which has burnt through almost half of its 2014 dollar stockpile,” the report added.
Break-even costs, the capacity to diversify and political resilience were identified as the three key factors determining the severity of the impact on stability when the expected energy transition begins to bite.
“Currently, if countries’ external break-evens – the oil prices they need to pay for their imports – remain above what markets can offer, they have limited choices: draw down foreign exchange reserves like Saudi Arabia since 2014, or devalue their currency like Nigeria or Iraq in 2020, effectively rebalancing their imports and exports at the expense of living standards,” the report explained.
Most oil and gas exporters have “become less diverse” since the 2014-15 and 2020 oil price crashes, the analyst said.
“Even those countries we consider more capable of diversifying have lacked the political will and/or economic ability to move away from oil,” Wolf said.
