Part 2: Analyzing the Credit Risk of the Biggest Oil Price Losing Economies
In Part 1 on our Country Risk Video & Blog Series, I explained how we can measure the impact of oil price drops on country risk from the perspective of S&P Capital IQ’s “Country Risk Intelligence and Surveillance Framework,” which takes structural, market and event indicators and aggregates them into a composite country risk rank.
Now, I would like to apply this framework to analyze the countries that were identified as “oil price losers” in a recent study by the IMF (International Monetary Fund), CIA and the CME Group -- each with a first order decline in GDP from anything between 1% for Bahrain to a staggering 25% for Libya.
So let’s take a look at our examination of the 22 biggest oil price losers.
This panel shows the analysis of our Country Risk Intelligence and Surveillance Framework as of September 22, 2015.
Now, let’s start with the countries that are considered least risky, despite the adverse impact from current oil prices: Canada, Norway and the US. While the oil price creates a challenging environment, in particular for energy-heavy countries like Canada and Norway, it is not considered a factor significant enough to lower the – so far – stellar opportunities for business operations in these countries.
Please keep in mind that this analysis is a holistic view on country risk, not on industry risk or the energy sector itself. Also, among these three countries, the US is the least affected because it is still, in aggregate, an oil importing country, and therefore, losses are largely balanced out by profits from low oil prices.
At the other end of the scale, somewhat surprisingly, is Venezuela with the lowest rank among all these oil country losers. This is because it undergoes a crisis from many different country risk aspects. First, the business environment is hostile and expropriation or transfer and convertibility risks are on the rise. Second, its sovereign risk is very high. And thirdly, the state’s revenues are severely impacted by current oil prices, leading to a reduction in social welfare, which has led to dissatisfaction of its population and social unrest. Altogether, this leads to the lowest country risk rank in this group, even below Yemen at the bottom of this list, which, at this stage, can be categorized as a failed state.
Another failed state in this list is Libya, which shows the most dramatic trend toward deterioration when looking at the event indicators. It is likely that this trend will affect the structural indicators soon if it cannot be reversed.
An interesting candidate in this list of countries is Iran, which, overall, scores somewhere in the middle. It is the only country with a somewhat ambiguous trend of geopolitical risk indicators. It has the most amount of positive trends (following the agreement on the use of nuclear energy and expected relief of sanctions), but this is partially offset by an almost equal number of negative trends that stems from, among other things, aggressive statements from the state’s religious leader. But note, that Iran now ranks higher – i.e. better – than Russia, where almost all indicators of country risk continue to go in one single direction: down.
To summarize, the countries that are most adversely affected by the current oil prices are very heterogeneous when it comes to their overall country risk assessment and the attribution of the oil price to these assessments. Country risk increases, in particular, for those countries that are not diversified and, therefore, heavily rely on the revenue from oil and gas exportation. The trend toward country risk deterioration is amplified wherever this is coupled with political instability, external sanctions or domestic unrest because of reduction in social welfare. Evidently, all of these geopolitical risks are often interconnected with low oil prices.
We hope that you found this analysis useful and that we can encourage you to think about a range of indicators for the assessments of country risk, your exposure to different countries and how such a framework can be applied in a limit-setting framework.
Hear Marcel speak about this framework in this video:
If you would like more information about S&P Capital IQ’s Country Risk Intelligence and Surveillance Panel or would like to be added to our mailing list, please contact us. And keep a look out for our future Credit Risk Videos and Webinars here and on our credit risk website.
 Eric Norland, CME Group, ‘The Geopolitical and Economic Consequences of Lower Oil Prices’, March 2015
 Lowercase nomenclature is used to differentiate S&P Capital IQ PD credit model scores from the ratings issued by Standard & Poor’s Ratings Services, which is analytically and editorially independent from S&P Capital IQ.