Moody's: Big-spending oil-exporting sovereigns most exposed to low oil prices

Oil-exporting countries heavily reliant on oil revenues and committed to large spending programs are most likely to have difficulty accommodating low oil prices, says Moody's Investors Service.

In the report "Global Oil Price Volatility: Oil-Exporting Sovereigns with Limited Policy Tools Are Most Exposed," Moody's says lower oil prices will, on balance, be a positive for global economic growth in 2015, although the exact impact will vary from country to country. However, the fall in prices presents oil-exporting sovereigns with challenges, which would be worsened if crude oil prices were to fall significantly below Moody's base case forecast of $80-$85 per barrel (pb) for 2015.

"In either case, the sovereigns that are best placed to withstand those challenges will be those that have the greatest policy flexibility and a wide array of counter-cyclical policy tools, including floating exchange rates and large foreign exchange reserves," says Lucio Vinhas de Souza, a Moody's Managing Director - Chief Economist and author of the report.

In November 2014, Moody's revised its oil price forecast down to between $80 and $85 a barrel in 2015, approximately $20 lower than the rating agency's May 2014 estimate. Oil prices remain high by historical standards, despite a nearly 30% fall in crude oil benchmarks since June.

The challenges for oil-exporting sovereigns will rise should prices fall still further, says Moody's. Oil exporters that are big spenders, most heavily reliant on oil revenue and with the lowest capacity to make necessary policy adjustments would be most negatively affected. Russia and Venezuela would fall into this category because they derive a large share of revenues from oil and have large recurring expenditure that may be politically challenging to cut.

In contrast, oil producers that use oil-related revenues for capital expenditure or place it in a reserve -- such as Saudi Arabia -- have higher fiscal buffers and could adjust more readily to a lower oil price. Mexico will also be resilient to a lower oil price given its limited exposure to oil in its external accounts and its conservative budget policy.

Oil importers would be positively affected -- although not equally so. Those that are battling high inflation and large oil subsidy bills -- such as Indonesia and India -- will benefit most from a lower price environment. For China, a $60 pb oil price would benefit private consumption and economic rebalancing, and somewhat moderate the ongoing growth slowdown. In the US, a $60 pb oil price and increased domestic production would support the balance of payments and private consumption via increased spending power. For Morocco, lower oil prices would support further energy subsidy reforms and help reduce fiscal and current account deficits.

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