S&P warn that if oil prices remain at levels currently implied by the futures curve, then Turkey and Pakistan could begin to experience significant economic imbalances, potentially affecting the credit ratings on these sovereigns. Moreover, a 20% rise in oil prices from current levels could put fiscal and external accounts in many other emerging market sovereigns under pressure.
The article, entitled, "Emerging Market Sovereign Credit Quality Slipping On Oil", simulates the effects of three oil price scenarios on the credit ratings of 12 prominent speculative-grade sovereigns that are net oil importers, namely Dominican Republic, El Salvador, Indonesia, Lebanon, Morocco, Pakistan, Panama, Philippines, Serbia, Turkey, Ukraine, and Uruguay. The three scenarios are for prices to remain at levels indicated by the current spot price and futures curve, for a 20% rise in prices, and for a 60% "super-spike", equivalent to a price of $100 per barrel in 2006
"We find that the external positions of Pakistan, Turkey, and Lebanon are particularly weak, with existing current account deficits likely to deteriorate as high levels of oil consumption are met by ever more expensive imports," said Standard & Poor's credit analyst Tim Reid.
"In contrast, Morocco, Serbia, and Indonesia are characterized by a vulnerable budgetary position, exacerbated in recent times by the extra fiscal cost of oil price subsidies or fuel tax cuts."
Although larger-than-expected subsidy cuts in Indonesia on Oct. 1, 2005, will serve to ease fiscal pressures, domestic fuel prices still lie some way below world prices. Conversely, Turkey treats fuel taxes as a key revenue source, helping to lower its relative fiscal vulnerability to rising oil prices. Finally, high levels of exports to oil-exporting Russia help to mitigate the oil price-related risks to Ukraine, where any challenges to the sovereign ratings are more likely to emerge from other sources.
The results of this study are not a prediction of sovereign ratings trajectories by Standard & Poor's, since it is highly unlikely that governments would allow external and fiscal indicators to spiral out of control in the manner outlined. Nevertheless, the scenarios help to illustrate the potential deterioration of economic indicators and reveal the dimension of the problem that governments may experience in the face of rising oil prices.
In certain cases, the deterioration may be even worse than simulated, as external and fiscal deficits increase, currencies depreciate, interest rates rise, and growth stalls. "An increased willingness to free domestic fuel prices from public administration should ensure that demand falls to more realistic levels, exchange rate and balance-of-payments pressures are lessened, and the fiscal impact is reduced," said Mr. Reid. "Without these measures, economies that currently run fiscal and external deficits and have high government debt levels will find an environment of rising oil prices increasingly difficult to accommodate," he concluded.
In a separate report, Standard & Poor's predicted that the pressure on China for energy will continue to grow over the next two decades as the Chinese government tries to meet skyrocketing industrial and consumer demand.
The dramatic economic transformation in China is draining the country's energy reserves, triggering a major hunt overseas for new supplies. This expansion strategy is already helping rattle the global oil markets and straining international relations. This is one of the reasons for higher energy prices, which are putting pressure on those companies that use large amounts of energy.
"Helping China to satiate its energy needs without sending the global energy markets into shock will require international cooperation, based on recognition of mutual interests," said Standard & Poor's credit analyst John Bailey. "Dialogue will be essential on all sides to avoid misunderstandings, and to develop large-scale energy projects."
China is now the second-largest oil consumer in the world, after the U.S. Last year, China guzzled about 314 million tons of oil, of which it imported 122.7 million tons. And the momentum is building. The country will account for 20% of the world's incremental energy demand over the next 30 years, according to the International Energy Agency (IEA). The IEA predicts that China's oil imports will soar from less than 2 million barrels per day now to almost 10 million in 2030. That will be equivalent to more than 80% of China's domestic demand for oil. China's startling increase in car ownership is one factor fueling its extraordinary growth in oil consumption. The country's growing industrial base is also sucking up fuel fast.
The Chinese government sees averting a fuel crisis and boosting supplies as central to national security. Its initiatives to date have focused on increasing offshore exploration and developing other energy resources, such as natural gas and nuclear power. But much more needs to be done to increase the country's energy resource base. In the meantime, as its search for oil steps up, so will the impact worldwide.