Oil rebound to US$50 seen too little to ease exporter default risk

[NEW YORK] Strengthening oil prices haven't been enough to reverse a growing risk of government loan defaults faced by countries from Latin America to Africa whose economies have been battered by the downturn.

The two-year collapse in energy markets has hit countries that rarely figure in oil-supply conversations - such as Ghana and Mozambique - as well as Opec giants such as Venezuela and Nigeria. Mozambique's bond yields rose to a record Wednesday, Venezuela is swapping debt to reduce its near-term payments and the cost to insure Nigeria's debt against default has doubled in the past two years.

"For many credit and political risk insurers, this is the worst claims environment they have ever seen," said Dave Anderson, head of credit and political risk at Zurich Insurance Group AG in Washington.

"For others, it's second to the global financial crisis in 2009. Once again, sovereign creditworthiness is under stress."

Oil advanced more than 10 per cent after the Organisation of Petroleum Exporting Countries provisionally agreed on Sept 28 to cut production for the first time since the 2008 global financial crisis. The group will decide on quotas for its members at a meeting in Vienna on Nov 30.

But even after almost doubling since a 12-year low of US$27.10 a barrel in January to above US$50, Brent crude is well below the record high US$147.50 reached in 2008.

Some governments in sub-Saharan Africa have been slow to "internalise" the fact that prices of oil and other commodities are likely to remain low, according to Abebe Aemro Selassie, director of the International Monetary Fund's Africa department.

The problem extends beyond oil markets, Mr Anderson said. The Bloomberg Commodity Index has dropped the past five years as burgeoning production and sluggish demand have swelled stockpiles of crude, metals and agricultural products. The price trough in commodities in emerging markets "is the worst since the 1986-2004 oil valley," he said.

Ghana, which depends on exports of crude, gold and cocoa, was forced to turn to the IMF in April 2015 for a bailout after ballooning government debt and falling export revenue triggered a 27 per cent plunge in its currency against the dollar in the prior year. Government debt rose 19 per cent to US$27.8 billion between August 2015 and July.

Mozambique went from investor darling to nearly empty coffers as prices for its commodity exports fell. The former Portuguese colony admitted in April to having more than US$1 billion in loans it hadn't disclosed to investors. It is in "debt distress," according to the IMF, and hired advisers to negotiate with creditors.

John Minor, director of crisis management at insurance broker Aon Plc's political risk practice, said that while he doesn't see a massive increase in credit defaults, "you are going to see some."

Nigeria, usually Africa's biggest oil producer, has been hit by both falling output and lower prices. The country's credit default swaps, contracts to insure its debt against default for five years, have almost doubled to 5.07 percentage points from 2.61 points two years ago.

The country worst-hit by the collapse of oil prices has been Venezuela. Food and energy shortages have spurred calls for a vote to recall Venezuela's President Nicolas Maduro, and traders are pricing in an 90 per cent probability the cash-strapped Latin American country misses payments in five years.

Even with the rebound in oil prices, the market remains too soft to help reinvigorate much economic growth in Venezuela, according to Aon's Minor. That's led some insurers who underwrite risks in that region to start pulling back, he said.

"It's sort of reached the point where it's become near impossible to insure. It is sort of the poster child of political risk."

Richer oil exporters such as Norway have been able to turn to their sovereign wealth funds to weather the slump. Saudi Arabia announced plans to sell about five per cent of its state-owned oil producer to bulk up its sovereign wealth fund. The cost of insuring Saudi Arabia's debt for five years is about 1.34 percentage points from 0.62 point two years ago.

But "the 'have nots' - the Venezuelas of the world - don't necessarily have any sovereign wealth funds to weather the oil price slump," said Seenu Akunuri, who leads the energy practice at PricewaterhouseCoopers LLP.

BLOOMBERG