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Oil exporters after the 2014-16 price collapse: In need of deeper reforms

Marc Stocker's picture
The 70 percent drop in oil prices between mid-2014 and early 2016 was one of the three largest oil-price declines in recent history, and despite a recent recovery, oil prices are still around 30 percent below their 2011-14 average. This created substantial obstacles for many oil exporters as they faced a combination of deteriorating growth prospects, exchange rate pressures, and weakened fiscal positions.

How have oil exporters coped with these challenges, and what further trials will they face in coming years? This article provides some answers, with the benefit of insights.

First, the 2014-16 collapse in oil prices had a broad-based and long-lasting dampening effect on activity in oil-exporting emerging markets and developing economies (EMDEs). Nearly 70 percent of these economies experienced decelerating activity in 2015 and 2016, largely driven by weakening domestic demand. In general, activity in oil exporters with floating exchange rate regimes and lower levels of export concentration was more resilient than in those with fixed exchange rates and high export concentrations (Figure 1).

Figure 1. GDP changes in oil exporters since 2014, by country groups 

Sources: International Monetary Fund, United Nations Conference on Trade and Development (UNCTAD), World Bank. Sample includes 31 oil-exporting EMDEs. Figures show average and range for each category. Exchange rate classification is based on the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions database. Export concentration index from UNCTAD.


Idiosyncratic factors, including sanctions against the Russian Federation, geopolitical tensions in the Middle East, and conflict and deteriorating security conditions in some low-income Sub-Saharan producers also exacerbated the impact of the oil price shock in the affected countries. In turn, economic headwinds in Russia and among countries of the Gulf Cooperation Council (GCC) also had adverse cross-border spillover effects on their respective regions through reduced trade flows, remittances, foreign direct investment, and grants.

Many oil-exporting EMDEs experienced sharp currency depreciations or rapid declines in foreign exchange reserves in 2014–16, but to varying degrees. Economies with floating exchange rate regimes were better able to stabilize reserves, but generally suffered sharper initial depreciations (Figure 2). Monetary authorities in several countries intervened in foreign exchange markets to support their currencies, and many raised policy interest rates to contain inflation amid large currency depreciations, or to support currency pegs. Some countries with fixed exchange rate regimes shifted to more flexible ones, while some central banks took steps to mitigate tightening banking sector liquidity.

Figure 2. Exchange rate pressures

Sources: Bank for International Settlements, Haver Analytics, International Monetary Fund, World Bank.
2. Nominal effective exchange rate and foreign reserved indexed to 100=January 2014. Last observation is March 2018.
3. Change in overall fiscal balance as a percent of GDP from 2014 to 2016.


Figure 3. Change in fiscal balance since 2014  
 
Sources: Bank for International Settlements, Haver Analytics, International Monetary Fund, World Bank.
2. Nominal effective exchange rate and foreign reserved indexed to 100=January 2014. Last observation is March 2018.
3. Change in overall fiscal balance as a percent of GDP from 2014 to 2016.


On the fiscal front, there was a broad widening of budget deficits.  However, countries with more flexible exchange rate regimes and a lower dependence on oil revenue generally fared better (Figure 3). Several governments implemented tax reforms to compensate for the loss of government revenues and to insulate themselves from future oil price fluctuations. Overall, spending cuts and tax increases have helped lower the fiscal breakeven oil price in oil-exporting EMDEs since 2015, although they remain higher than the current oil price in some countries.
 
Number of reforms implemented in oil-exporting EMDEs
Sources: World Bank Doing Business.
Number of reforms reported in Doing Business. Sample includes 35 oil-exporting EMDEs.


The collapse in oil prices provided impetus for broader reforms, particularly of energy subsidies. Several large oil-exporting EMDEs have also unveiled medium-to long-term plans to reduce reliance on the energy sector. Examples include: reducing labor market rigidities, supporting foreign investment, expanding infrastructure investment, and improving the business environment (Figure 4).  However, in some cases, structural reform agendas have faced legislative or implementation delays or were scaled back as fiscal pressures receded.

What are the remaining challenges?

The prospect of persistently moderate but also volatile oil prices intensifies the need for improved monetary and fiscal policy frameworks as well as for reforms to reduce reliance on oil, increase value added and productivity in the non-extractive sector, and boost competitiveness, skills acquisition and adaptability.

Monetary policy frameworks that take more explicit account of oil price fluctuations could help foster resilience. For countries with floating exchange rate regimes, options include targeting the domestic currency price of exports, the GDP deflator, or even nominal GDP. Countries with currency pegs could also benefit by adding oil prices as part of their targeted currency basket.
Fiscal reforms also remain necessary in a majority of oil-exporting EMDEs. Only one-fourth of oil-exporting EMDEs have fiscal rules to smooth the impact of oil price cycles on economic activity and public finances, and some of these were cast aside during the period of collapsing prices.

Over the medium term, diversification away from oil as a source of revenue is be needed to improve growth and development prospects. The successful experience of some energy producers suggests the need for both vertical diversification in oil, gas, and petrochemical sectors, as well as horizontal diversification beyond these sectors. Proper regulatory and institutional conditions need to be in place to attract new investments, foster skills acquisition, boost competitiveness and integration in regional and global value chains.
 
This article is drawn from an analysis that appears in greater detail in a Special Focus section of the April 2018 Commodity Markets Outlook and in a more extensive working paper