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Asia Today ISSN 1861-4604 Tuesday, February 20, 2018

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Oil exporters need to cut fiscal spending: IMF

Oil prices have dropped by more than half

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BANDAR SERI BEGAWAN: OIL exporters will need to reduce their level of government spending on back of the “persistent” decline in global oil prices, a representative of the International Monetary Fund (IMF) said yesterday, reports The Brunei Times

While some key oil exporting countries such as Saudi Arabia have fairly large financial buffers and can adjust to new, lower oil prices at a more gradual pace, other countries such as Russia and Nigeria can’t do so without significantly reducing government expenditure, according to Olivier Blanchard, director of IMF’s research department.

In a briefing held during the launch of IMF’s flagship publication World Economic Outlook, Blanchard said falling oil prices is “clearly bad news” for oil exporters and for firms involved in energy production.

Oil prices have dropped by more than half since June as output has soared while demand growth has slowed. Saudi Arabia and other members of the Organization of the Petroleum Exporting Countries (OPEC), which account for 40 per cent of global oil production, are hoping lower fuel prices will stimulate more demand in the long run.

Brent crude oil prices fell towards US$48/barrel on Tuesday after the International Monetary Fund cut its forecast for global economic growth in 2015 implying lower demand for fuel.

Blanchard attributed the declining oil prices to the “unexpected change” in OPEC strategy in the face of increased production from non-OPEC countries.

He said the IMF expects the factors that had led to the OPEC decision to remain in place. There might be some turnabout and increase in the price of oil, but the IMF doesn’t see prices returning to the level posted six months ago.

“Some energy firms may also find financial risk. Clearly if you assumed the price of oil was going to be U$100 (per barrel) and it is now US$50 (per barrel), it may be that some investments don’t make sense and some firms will be in trouble,” Blanchard said.

However, the IMF believes the risk posed by the problems of some countries and some firms to the rest of the world are quite ‘limited’.

“We do not see a major systemic crisis coming from the decrease in the price of oil,” Blanchard said.

He said lower oil prices will boost the economies of oil importers, despite negative effects of deflation in some countries.

“This is relatively straightforward,” Blanchard said.

He said the decrease in oil prices will raise real income and cut the cost of production in energy-consuming industries.

Brunei is one of the countries that rely heavily on oil exports, with the oil and gas sector accounting for roughly 70 per cent of the Sultanate’s GDP.

In a recent media interview, Minister of Energy, Yang Berhormat Pehin Datu Singamanteri Col (Rtd) Dato Seri Setia (Dr) Hj Mohd Yasmin Hj Umar said that the drop in oil prices will not hinder production or downstream activities.

In a separate interview, Paulius Kuncinas, regional editor of economic research organisation Oxford Business Group, said fiscal reserves built up from prudent spending over the years has placed Brunei in a situation where it has no cause for alarm from falling oil prices.

Kuncinas said while there’s pressure to streamline and rationalise expenditure, he didn’t see major cuts in fiscal spending.

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