As oil prices fall, who are the winners and losers in EMEA?

The recent decline in energy prices, as anticipated in FSG’s 2014 Events to Watch, is raising alarm about what a sustained decrease would mean for the global economy. Across Europe, Middle East, and Africa, however, there will be winners as well as losers from this trend, something MNC plans for 2015 need to reflect.

FSG has developed an index that examines the relative sensitivity of markets across EMEA to a decrease in energy prices, as well as markets that could inversely benefit from lower energy prices. The index considers both the importance of energy to exporters’ economies as well as their relative level of insulation from shocks through measures such as sovereign wealth funds. For energy importers, it considers the burden energy imports place on consumers and governments in the context of the public and private sector’s overall economic resilience.

Oil price drop index sensitivity EMEA

Losers:

In CEE, key growth markets such as Azerbaijan and Kazakhstan, as well as Russia are all heavily dependent on energy exports. While they all have sovereign wealth funds to help mitigate the impact of falling energy prices, all three markets have experienced a slowdown in growth already this year, which would be exacerbated by the lower government revenue brought by falling energy prices. This is especially the case for Russia, where an energy price drop could hardly have come at a worse time for the already struggling economy.

In MENA, GCC energy exporters are at risk, but have been relatively cautious in balancing their budgets based on lower energy prices, which gives them flexibility in the current environment. One MENA market where the economy will be negatively affected is Iran. The country’s budget cannot be balanced unless oil prices average US$140 per barrel in 2014. This means that Iran’s modest economic recovery could be reversed as a result of a sustained drop in oil prices.

In SSA, Nigeria and Angola are particularly at risk, especially because the drop in oil prices is coming at a time when demand from China – a major export market for both countries – is also slowing, possibly amplifying a negative economic impact there.

Winners:

In Western and Central Europe, lower energy prices can boost the competitiveness of products for export and support consumer spending power at a time when consumer confidence has been depressed. While lower energy prices may reduce incentives to diversify away from oil and gas imports, the geopolitical importance of energy independence from Russia is likely to maintain investments in the energy sector in the region relatively high.

In MENA, countries in which energy imports weigh on foreign reserves and the currency’s stability could benefit. These include Egypt and Turkey, both of which could see some additional public spending redirected from energy imports to boosting economic growth and supporting consumer spending. Falling oil prices are particularly beneficial in the case of Egypt, where a partial reduction of energy subsidies has fueled inflation.

In SSA, East African markets such as Kenya, Uganda, and Ethiopia will benefit from low energy prices. However, a number of ongoing oil and gas exploration projects in SSA, which are due to bring domestic energy production online in the next five to ten years, could see reduced investor interest as forward projections for return on investment are eased.

FSG clients can read our full analysis on energy price sensitivity here. To learn more about FSG’s series on external disruptors to EMEA performance (also includes analysis on China’s slowdown and currency volatility), listen to our podcast.

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