Emerging market oil producers have had an easy ride for much of the last decade. High prices facilitated big increases in government spending. The price of oil needed to balance their budgets has accordingly climbed to an average of almost $100bbl over the last 3-4 years from less than $30bbl a decade ago, according to Deutsche Bank.

Oil prices have now fallen below levels needed to balance budgets in all but a couple of cases. With forwards markets suggesting that the drop in prices is more permanent than temporary, a period of adjustment will therefore be necessary.

Those countries without large asset buffers have already been forced to allow their exchange rates to weaken to preserve the local currency value of their oil revenues.

Together with some spending restraint, this should reduce the breakeven price in Russia to $78bbl, limiting the deficit to levels that can be readily financed from the oil savings funds and moderately higher borrowing. While we see little need for further currency weakness at current oil prices, the central bank may look to limit any rouble strength

In Nigeria, reduced spending and the devaluation of the naira have reduced the breakeven price to $90bbl. We think further depreciation will likely be necessary to avert a third year of deep spending cuts or much higher borrowing. Progress in reducing the “leakage” of oil revenues could alleviate this pressure.

While Venezuela has also effectively devalued its currency, reducing the breakeven price to $89bbl, it remains overvalued and we think that the risk of an external default looms large.
With their larger oil savings funds, the Gulf producers can afford to adjust more slowly. Saudi Arabia’s spending is expected to increase this year and, at about $105bbl, its breakeven price is now one of the highest in EM.

The resulting large budget deficit (18% of GDP) will be financed from accumulated savings. We think the government will begin to restrain spending next year; and with little negligible debt and assets amounting to 100% of GDP, it can afford to adjust relatively slowly.

Elsewhere in the Gulf, Kuwait and Qatar will likely continue to run budget surpluses this year, albeit much reduced from recent levels, while the budget in UAE will be close to balance at current oil prices. The situation is much more challenging in Bahrain and Oman, which have high breakeven prices, limited oil savings, and lower oil reserves.

Neither has yet begun to tighten their budgets in any meaningful way but both will need to do so soon in order to safeguard the credibility of their exchange rate pegs without the need for external support.
Source: Deutsche Bank