Pakistan, Turkey to face economic pressure if oil prices stay high, says S&P Report

By Reshmi Basu

New York, Oct. 12 - Pakistan and Turkey could face significant economic imbalances if oil prices stay at the levels currently implied by the futures curve, according to a Standard & Poor's report titled "Emerging Market Sovereign Credit Quality Slipping On Oil."

Additionally, a 20% surge in oil prices from its current levels could pressure fiscal and external accounts in many other emerging economies.

The report determines how oil prices might impact oil-importing sovereigns that fall in the speculative-grade category. The study is meant to simulate the potential unraveling of economic indicators as well as the problems government may experience at the current level of oil prices or if there are future hikes. The three scenarios include the current level of oil prices, a 20% spike in prices and a 60% hike in prices, which translates into $100 per barrel in 2006.

"We find that the external positions of Pakistan, Turkey and Lebanon are particularly weak, with existing current account deficits likely to deteriorate as high levels of oil consumption are met by ever more expensive imports," wrote Timothy Reid, the main author of the report, along with John Chambers as secondary analyst.

"In contrast, Morocco, Serbia, and Indonesia are characterized by a vulnerable budgetary position, exacerbated in recent times by the extra fiscal cost of oil price subsidies or fuel tax cuts."

The reports suggests that an increased willingness to free domestic fuel prices from public administration will in turn result in a more realistic level of demand.

"Without these measures, economies that currently run fiscal and external deficits and have high government debt levels will find an environment of rising oil prices increasingly difficult to accommodate," said Standard & Poor's.

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