Sharp differences in export diversification and foreign net asset positions help explain why some oil-producing countries are likely to weather sustained oil price pressure much better than others, according to Fitch Ratings. A Fitch study of sensitivity to an extended USD50/bbl West Texas Intermediate (WTI) crude oil price shock employed a simplified graphical approach to mapping relative vulnerability across a disparate set of issuers. Risks for a large sample of sovereign, corporate and US public finance issuers were measured with respect to two parameters: i) expected revenue and EBITDA declines and ii) leverage.
In the case of sovereigns, relative vulnerability was captured by comparing potential declines in oil’s contribution to external receipts and ratios of sovereign net foreign assets to GDP (net leverage). This stress is more severe than our latest oil price assumptions, contained in our Global Economic Outlook published on Tuesday, of USD65/bbl (Brent crude) for 2015 and USD75/bbl for 2016. Brent crude has recently traded at a premium of between USD5 and USD10/bbl to WTI.
The USD50/bbl crude price sensitivity scatter plot can be seen here. Among sovereign issuers represented in the cross-sector scatterplot, those in the lower left quadrant are likely to be most affected by sustained lower oil prices, given their relatively weaker net foreign asset positions and greater export revenue exposure in a USD50/bbl environment. Issuers in the upper right quadrant are better positioned than their peers, both in terms of net leverage profiles and prospective revenue impact.
High-yield issuers are highlighted in the plot. Notably, almost all of the issuers located in the high-sensitivity portion of the chart (lower left) are rated below investment grade by Fitch. The impact of an extended USD50/bbl crude price scenario on external revenues depends on the diversification of a country’s export base. Weak business environments and institutional frameworks can hinder diversification. This is reflected at either end of the sensitivity scale on the vertical axis, with Norway in the strongest position and Venezuela and Angola the weakest. High savings provide significant insulation to Kuwait and Saudi Arabia, both rated ‘AA’, even though they have relatively undiversified revenue bases.
Oil price vulnerabilities are factored into sovereign ratings. Norway, rated ‘AAA’ and ‘Abu Dhabi, rated ‘AA’, are in the low debt/low impact quadrant. All sovereigns in the high-debt/high-impact quadrant are below investment grade. Policy responses can mitigate oil price vulnerabilities. In addition, measures to diversify revenue, cut spending (particularly subsidy reform) and enhance the investment climate can strengthen sovereign credit profiles in a prolonged lower oil price environment.