A handful of oil-rich countries in the Middle East could wipe out the savings of their deep-pocketed sovereign wealth funds — nationally managed pools of money — if oil prices remain low in the medium term, the International Monetary Fund said in an online post Monday.
Under present conditions, Bahrain and Yemen will exhaust their reserves within two years and "most other countries will run out of buffers in four to seven years," the authors said. "Among Middle East oil exporters, only the United Arab Emirates, Qatar and Kuwait’s fiscal buffers will last for over 25 years on current fiscal plans and oil price projections."
The dizzying oil-price plummet, from more than $100 a barrel last summer to roughly half that figure recently, has triggered concerns that it’s time for national belt-tightening.
"So far, there’s not been that much impact as yet," Bruno Versailles, one of the authors of a report the IMF published Oct. 15, said in an interview. "The effect has been cushioned by countries using their rainy-day funds," he said when asked about fallout from the crash.
In nations where the government subsidizes public-sector employment, often through funds from fossil energy wealth, residents could soon lose their jobs, said Versailles, an IMF economist specializing in oil, the Middle East and Central Asia.
The Oct. 15 report found several members of the Cooperation Council for Member States of the Gulf and other energy-rich countries will have a fiscal deficit of 10 to 20 percent of their gross domestic product, under current projections. At present, Saudi Arabia has a fiscal deficit of about 20 percent of its GDP for 2015, Versailles said.
Without a shift in budgeting policies, many of these countries will go bankrupt in a few years. Versailles said it would take about five years for Saudi Arabia, without fiscal changes. Of course, the probability of a national government making no budgetary changes as its coffers empty is slim.
"The main message is that most of these countries are only starting to put fiscal measures in place," Versailles said. "And we’re saying they should be doing more."
A paradigm shift?
Some top oil-exporting countries, like Saudi Arabia, which recently had its first debt offering since 2007 to raise money, have started spending down some of the reserves of their sovereign funds.
The fall in prices will challenge governments’ ability to "balance their books" and pay for public services, including public-sector jobs, said Rabah Arezki, chief of the commodities unit within the IMF’s research department and one of the blog post’s authors.
Cheaper oil can shock energy-exporting countries, which typically see domestic prices of imported projects, like food, rise, he said.
Flagging demand from emerging-market nations and a glut of oil in the market pushed prices down, Arezki said, adding that "oil prices are projected to stay lower for longer."
Few nations have so-called wealth funds, and many were built through oil and gas riches.
As of March, there was an estimated $7.3 trillion in assets in sovereign wealth funds, $4.2 trillion of which was connected to oil and gas development, the IMF blog post reads.
BP PLC, which reported quarterly profits yesterday of $46 million, less than half of its profit from the same period last year, said its planning through 2017 is based on prices of $60 per barrel.
Spencer Dale, BP’s group chief economist, in a study published Thursday, said a paradigm shift in the petroleum marketplace may already be underway.
"The principles and beliefs that served us well in the past are no longer as useful for analyzing the oil market," Dale said.
The U.S. "shale revolution" and "increasing concerns about carbon emissions and climate change" are the two more salient developments threatening to upend the traditional oil business, he said.
"In the short run, countries which have buffers such as [Persian] Gulf countries can smooth" their transition in a low-price market, Arezki said, though long-term spending cuts may be unavoidable.
"Countries such as Norway, Russia and others such as Algeria have let their currency depreciate, which somewhat [cushions] the shock," he added.