Treasury and Trade Solutions
18
Valentino Gallo
Global Head,
Export and
Agency Finance,
Treasury and Trade
Solutions,
Citi
The sharp decline in the oil price since June 2014 — it more than halved in
just six months — has focused attention on the role of energy in the global
economy. Changes in energy prices have affected the viability of oil and
gas exploration and some facilities have been mothballed: A steep fall in
investment is anticipated.
For many oil and gas exploration
projects longer-term factors —
such as energy security — play
an important role in determining
whether they go ahead. Some
countries have made increasing
renewable sources of energy a
political priority. While falls in oil
prices may require governments to
fine-tune the support offered
to renewables, backing will
not evaporate.
Moreover, the flexibility of trade
finance solutions should ensure that
a wide variety of energy-related
projects continue to progress.
Increased volatility will reduce
the appetite of some investors
for energy-related trade finance.
However, export credit agencies
(ECAs) are likely to step into the
breach and increase their support
for energy projects.
Winners and losers
Lower oil prices have a different
effect on oil importing and exporting
countries. Economies in oil-importing
countries, such as China and
India, and — in the developed world,
Europe and Japan, have been
boosted by lower oil prices, with
falling inflation, improvements in
their balance of payments and the
freedom to maintain expansionary
monetary policies.
By driving growth, lower fuel costs
should increase tax revenues and
may offer an opportunity to reduce
fuel subsidies, which are often
a sizeable part of government
spending in emerging markets. Oil
importers should therefore have
additional resources to invest in
infrastructure, which should increase
demand for trade finance solutions.
In contrast, lower oil prices will
weaken oil-exporting countries’
current account balances and public
finances and reduce growth. For
some large oil exporters, especially
in Gulf Cooperation Council (GCC)
countries, significant buffers and
available financing should minimize
cuts in government spending.
EXPORT CREDIT AGENCIES
SUPPORT THE VOLATILE
ENERGY INDUSTRY
Lower fuel
costs should
increase tax
revenues and
may offer an
opportunity
to reduce fuel
subsidies,
which are often
a sizeable part
of government
spending in
emerging
markets.
