Citigroup’s analyst team wins the coinage of the month award for “oilmageddon.” Seriously, that’s cute. Thanks, citi! Back me up- are more analysts talking like they spend all day on reddit or what? I mean, they might actually be. You know, these kids…
Oilmageddon means, if I understand correctly, that developing countries (resource extraction economies) are suffering from low commodity prices, meaning low export income, and a strong US dollar, meaning capital flight and low investment. Plus, even with the fed raising rates interest rates are still very low or even negative worldwide, so simply leaving money in a bank won’t keep a country, or more importantly that country’s sovereign wealth fund, in anything like good shape. The report itself doesn’t seem to be public, but apparently suggests that a global deflationary recession will leave “nowhere to hide in equities. Cash wins.”
What the Bloomberg story doesn’t mention is that many of these same emerging markets owe a crap-ton of money to international lenders, particularly the IMF and World Bank, and those debts are denominated in dollars. In a good year, those can be burdensome, but with reserves and incomes so low, and dollars so expensive, you better believe the third world will be slashing social programs, health programs, environmental programs, probably law enforcement and ag/food subsidies as well. If they do have to “restructure”- privatize stuff to make the WB/IMF happy- they’ll be doing it at fire sale prices, too. Remember, a key feature of “oilmageddon” is that those tropical hardwoods and iron ore just aren’t worth much per tonne right now.
Oilmageddon! might just end up being another way of saying “a really bad time to be poor.”
The Azeri Question
Which reminds me of another question I’ve had for a bit now. Why are the IMF and World Bank lending to Azerbaijan? I’ll wait while you look up where Azerbaijan is (hint- just west of that burning oil platform above). Okay, back?
To understand how weird this is, it helps to understand what the Bretton Woods institutions are supposed to do. In theory, countries with undercapitalized economic sectors (that means stuff they could make and sell, if they had more tools) are able to get loans from private lenders. If you have proven oil reserves, and lots of petroleum engineers, and not enough derricks, you can go to citigroup or somebody and ask for a loan, and they’ll buy you the equipment to bring the oil to market. Then, you use the profit on the oil to pay back the bank. Capitalism, in theory.
Where the IMF and World Bank come in is when this process doesn’t seem to be working, because of political barriers. Sometimes these barriers are actually infrastructure related- you need a good highway to get to the oilfields, or a deepwater port to load tankers- but mostly they relate to corruption and human rights concerns. If a debtor country could produce a crap-ton of oil, but doesn’t want to massacre the indigenous people who happen to live on top of it, for instance, the WB and IMF help them “restructure” the problem away. If the country got a grant or a loan to build health clinics and water treatment centers for those indigenous people in their new camps, and instead somehow the money ended up “for safekeeping” in US CDOs and hedge funds in the name of the Finance Minister’s son, well, the World Bank and IMF will offer a new loan to cover the cost, but only after the Finance Minister’s entire family have been restructured as well. The term of art is “lender of last resort” and the two institutions assume a great deal of control over how a country’s economy is set up as part of the terms of the loan.
If you’re curious about how this works, Maarten Troost has written a bit about his time with the WB. There are other sources, but not quite so colorfully written.
By all accounts, Azerbaijan is suffering from low oil prices. The IMF’s own report is pretty devastating in its assessment, with plenty of specifics:
The near-term macroeconomic outlook has deteriorated considerably. Non-oil GDP growth is expected to decelerate to 3.5 percent this year as the sizable fall in export revenue and the slow down in public investment will spillover in the private sector demand, already weakened by some loss of confidence after the devaluation. … With low oil prices, the current account surplus will narrow to 5 percent of GDP while the fiscal balance will swing into a deficit of about 7 percent of GDP. A sharp and possibly sustained decline in GDP cannot be ruled out if oil prices fall further or the post-devaluation stress in the banking system is larger than anticipated.
(The devaluation they’re talking about has to do with the decision last year to float the Manat after a decade of currency protection- it went badly)
When it comes to what, specifically, the IMF and WB think should actually be done, though, the language becomes much more obtuse:
Progress on structural reforms has been insufficient in many countries, both AEs and EMDCs. More determination is required to implement these reforms and thus eliminate key impediments to growth. Many of these impediments, such as low productivity, insufficient competition, a lack of good governance, and inadequate business conditions, are long-lasting and deeply rooted. On top of this, new head winds to growth due to important long-term trends, such as population aging, have emerged. Current accommodative monetary policies and low oil prices provide a very favorable environment to implement structural reforms and bolster potential growth in many countries.
A prompt implementation of structural reforms would also have beneficial effects for strong, balanced, and sustainable growth through another key channel- confidence. In implementing these reforms, policymakers would demonstrate both their commitment to, and their capability of, putting in place necessary measures, thereby going beyond demand-side policies, exploiting complementarities, and rendering macroeconomic policy frameworks more balanced and credible. This is essential in order to convince financial markets and re-launch private investment, both domestic and foreign.
Some of that is the usual impenetrable financialese (AE=advanced economy, EMDC=emerging market/developing country) but some of it is deliberate obfuscation. What should jump out at you is the line about “[c]urrent accommodative monetary policies and low oil prices provide a very favorable environment to implement structural reforms”- essentially dollars look good and the poor suckers don’t have any other options.
Azerbaijan shouldn’t really need the World Bank. With a land area just smaller than the US state of Indiana and just larger than Belgium, it produces more oil than every former Soviet republic except Russia and Kazakhstan. Oil prices are very low, but under the official capitalist model they should be able to get loans from private lenders, and pay them off in the future when oil rebounds. The oil, after all, isn’t going anywhere, and the engineers and roughnecks are only going to get better at extracting it. Why go with the IMF/WB at all?
I can see only two answers here, though I welcome suggestions on others. First, Alijev is enough of a crook that the Bretton Woods folks might, out of the goodness of their democratic hearts, want him gone, and if the process nets them a great big oilfield to contract with Shell, BP, or some other donor-nation stalwart, well, fantastic. Basic predatory international finance.
The other answer, though, is the one that brings us full circle back to the citigroup report at the beginning of this post. The only way any of this makes sense is if the financial world believes oil really isn’t coming back. Think about it- if you were Ilham Alijev, and the IMF offered you a $4bn loan conditional on leaving office, removing currency and capital controls, privatizing the CBA, killing wage controls, selling your roads to Kellogg Brown and Root, and maybe Halliburton takes over the Baku terminal on the Caspian, why would you take that deal? Why would you take it if you could just offer a cut of your enormous oil revenue stream to Royal Bank of Scotland in exchange for a few years of supports to get through the down cycle? Why would the IMF even make the offer?
Oilmageddon the word is new. I’m not sure the concept hasn’t been kicking around for a while now…