World banks face new oil-price test
The world's beleaguered banking system is bracing itself for the impact of lower oil prices. In 1974, bankers had to recycle the excess petrodollars sloshing around the world. Today, those excess dollars are gone and bankers are preparing for the effects of falling oil prices.
For all oil-producing countries, lower oil prices will mean lower revenues. But for some of these countries, lower revenues will make it even tougher for them to make payments on their international loans. Already, Indonesia has begun talks with the International Monetary Fund (IMF), asking for some $600 million in loans. Bankers expect other major producers - particularly Nigeria and Venezuela - may also need loans from the IMF to meet balance-of-payments deficits.
At the same time, however, lower oil prices may mean a lower inflation rate. If inflation continues to decline, it could result in lower interest rates.
In New York, the immediate reaction in the financial markets was to interpret the oil-price cutting as a positive sign. As a result, interest rates declined in the bond markets, which often act as a barometer of what sophisticated investors are thinking. Lower interest rates would benefit both bankers and consumers.
For the near future, however, there is concern about the impact of lower oil prices on the banking system. ''Over the short term, it should have an adverse impact on the banking system,'' as it tries to adjust to the rapid changes,'' says Richard Debs, president of Morgan Stanley International. The bankers have just completed a six-month bout of rescheduling loans to the less-developed countries. And Congress has pointed a spotlight at bankers, asking probing questions about their international-loan activities.
It's a spotlight that makes them uncomfortable, since international-loan problems have already whetted Congress's appetite for tighter controls over international lending. ''There is a strong sentiment to have someone oversee the amount of loans made to foreign countries,'' says Peter Herrick, president of the Bank of New York. And, he adds, ''This is essentially a form of credit controls, which none of us cares for.''
Congressmen have been badgering the bankers about the high interest rates consumers are paying at a time when the general level of interest rates has fallen. To some members of Congress, there is a direct correlation between the problems the banks are having with their foreign loans and the high level of interest rates. It is a contention the bankers dispute. ''We're getting a bum rap on this one,'' Mr. Herrick says.
There is no doubt the issue will continue to flare up as the bankers face up to the impact of lower oil prices.
According to Hamid Shomali, an economist at Bank of America, for every $1 drop in the price of a barrel of oil, the Organization of Petroleum Exporting Countries (OPEC) producers will lose over $5.6 billion a year in revenue. Thus, a drop of $5 a barrel means a loss of $28 billion to OPEC, which Bankers Trust Company estimated had revenues last year of $190 billion. And non-OPEC producers , especially Mexico, will be hard pressed. For every $1 drop in oil prices, Mexico loses almost $600 million in annual revenue.
For much of OPEC, this loss of revenue will not spell hardship. However, for Nigeria, Indonesia, Venezuela, and non-OPEC Mexico, it will mean financial problems.
As Mr. Shomali notes, the countries with large populations and ambitious development programs requiring large imports, are the ones in trouble.
Trouble, however, is a relative term. In 1974, when the price of oil shot up from $2.50 a barrel to $12.50 a barrel, the world economic system entered an extended period of stagflation - little economic growth combined with inflation. Later, in 1978, oil prices shot up again, once more creating dislocations. There was an enormous transfer of wealth. But the banking system successfully recycled the petrodollars. This time, it will be faced with a similar task, with numbers much smaller and easier to work with.
For example, Nigeria, with a population of 120 million, has a debt of $9 billion. Debt service comes to $1 billion to $1.2 billion a year. Last year, it had $13.5 billion in oil revenues.
The same is true of Indonesia. With a population of 150 million, it has a debt of $22 billion, requiring annual interest payments of $2 billion. Last year , oil revenues amounted to over $10 billion.
Both countries have balance-of-payments problems relating to reduced revenues from their oil exports.
''What these countries need to do,'' Mr. Shomali says, ''is to cut back on their expenditures.'' Agrees George Clark, executive vice-president at Citibank: ''What's important here is how well you manage with what you have.''
Meanwhile, to smooth the transition for such countries, Robert Parry, executive vice-president at Security Pacific Bank, says the IMF and commercial banks will have to provide further loans. ''In my view this is a liquidity problem,'' Mr. Parry says, ''and essentially a pickup in economic activity worldwide will be a powerful force in solving their problems.''
In fact, such a worldwide pickup, combined with better management, says Mr. Clark of Citibank, will help to turn Mexico ''from a bad financial situation to a strong one in 1983.'' He expects this improvement will come even though Citibank is estimating Mexico will have $3 billion less in oil revenues this year. The key, he says, was lowering the exchange rate from 25 pesos to the dollar to 150 to the dollar. ''You encourage exports and discourage imports,'' he says. But not everyone is as optimistic as Mr. Clark about Mexico's short-term future. At any rate, an improvement in Mexico will aid the banks.
And a decline in oil prices, Mr. Parry notes, should help Brazil, also a ward of the banks. Brazil, like many other developing countries, says Mr. Parry, should receive a ''positive triple whammy.'' This would involve lower oil prices , reducing its balance-of-payments problems; lower interest rates, easing its payments problem; and higher world growth, which should aid its exports. Even Mexico stands to benefit from lower interest rates. With every 1 percent drop in interest rates, Mexico saves $750 million. Unfortunately, Mr. Parry sighs, ''Oil prices are dropping faster than interest rates.''
There is no doubt that there are risks. Barton M. Biggs, managing director of Morgan Stanley & Co., said late last fall that, if the price of oil were to drop to $20 a barrel or lower, ''the resulting financial crisis might be so serious as to disrupt the stimulative effects of lower oil prices. Companies would fail, and banks might.'' For example, much of the North Sea oil and some of the Alaskan crude costs over $20 a barrel to find and produce. If the oil price were to drop below these levels, these reserves would not be economical to produce. For companies with billions of dollars tied up in these projects, such a drop could be calamitous.
The Chase Manhattan Bank, in a recent study entitled ''The Energy Outlook Through 2000,'' says that, if the price of oil were to fall to $26 a barrel, the OPEC cartel would have a deficit of $44.8 billion between projected revenues and what the bank terms ''minimum acceptable oil revenues.'' The bank defines this term as ''those revenues below which the internal political stability of any given country would be threatened.'' The burden of falling oil prices on oil producers For every $1 drop in price per barrel, each nation's annual loss (millions of dollars, based on current production levels) OPEC countriesm Non-OPEC countriesm Saudi Arabia $2,200Mexico $585 Venezuela 565Great Britain 347 Iran 530Norway 145 United Arab Emirates 400Oman 110 Nigeria 383Malaysia 97 Libya 365Syria 76 Indonesia 310Canada 68 Iraq 266Egypt 55m Kuwait 248Total $1,483 Algeria 183 Qatar 113 Gabon 47 Ecuador 40m Total $5,650 Source: Bank of America