Oil bailouts and austerity begins: geopolitical implications.
01 February 2016 2:56 pm
The low oil prices are causing massive problems across developing markets. And potentially, that could change geopolitics.
First, we’re seeing the bailouts.
Nigeria has asked the World Bank and African Development Bank for $3.5bn in emergency loans to fix its budget. Nigeria’s economy is Africa’s largest. It has been hit hard by the fall in crude prices — oil revenues are expected to fall from 70 per cent of income to just a third this year.
Meanwhile, the International Monetary Fund and World Bank are dispatching a team to oil and gas-dependent Azerbaijan to neotiate a possible $4 billion emergency loan package in what threatens to become the first of a series of global bailouts stemming from the tumbling oil price.
At the same time, the IMF has warned that Saudi Arabia will have to overhaul its generous system of oil subsidies and introduce a host of new taxes, including consumption levies such as VAT. The Fund says Saudi Arabia also has to slash subsidies on water and electricity.
Saudi Arabia brutally repressed protests during the Arab Spring in 2011, when uprisings sprung up across the Middle East. Rulers were forced out of power in Tunisia, Egypt, Libya and Yemen and destabilized in Bahrain and Syria but Saudi's theocratic monarchy remained entrenched.
The House of Saud continues to take an extremely tough line on any hint of political dissent. It passed a law in 2014 that categorized a broad array of non-violent offenses as "terrorism," including "endangering national unity" and "harming the reputation of the state."
They are obviously worried and for good reason too.
For Saudi Arabia, a decline in social spending and a reduction in subsidies comes the risk of rising domestic turmoil, as highlighted by the Arab Spring in 2011 when high inflation, lower growth and inequality resulted in mass demonstrations across the Middle East. Watch this space.