By Mike Dolan
LONDON, July 21 (Reuters) - A sharp retreat in oil prices
like that of the early 1980s could have severe repercussions for
emerging economies in eastern Europe which benefited indirectly
from recent petrodollar windfalls, a study showed.
Tracing the destination of the waves of cash absorbed by
oil-exporting countries due to the seven-fold increase in crude
prices since 2001, a working paper by the International Monetary
Fund released late on Friday said comparisons with the 1970s and
1980s bear watching.
There are differences between now and then in the countries
driving the surge in petrodollar bank deposits and those gaining
from them, but the study's author and IMF economist Johannes
Wiegand said close parallels with the last oil boom still stand.
"Bank recycling of petro dollars to emerging market
economies is found to be almost as important as in the 1970s and
1980s," wrote Wiegand, adding that the petrodollar bank flows
this time around tended to originate in countries like Russia,
Libya and Nigeria rather than the Middle East.
"As one consequence, a fall in oil prices could yet again
disrupt financing flows to emerging economies," the study said.
"Especially at risk could be countries that rely heavily on bank
loans to finance external deficits."
OVERFLOWS
The study centres on the petrodollar recycling theme of the
1970s and 1980s, where the surge in oil prices created windfall
export receipts in the Middle East which were largely saved and
deposited in industrial country banks.
Those banks then lent on much of that money to emerging
markets, especially in Latin America. When the oil boom subsided
-- crude prices fell by more than 70 percent in the five years
to 1986 -- bank flows to emerging markets reversed sharply and
helped trigger the Latin America debt crisis.
Wiegand debunked the idea it's different this time around.
Even though national accounts in emerging markets are mostly
in surplus, many deficit countries remain and the emerging
European region -- excluding oil exporters-- ran an average
current account deficit of 4.5 percent of national output
between 2001 and 2007.
What is more, deposits remain an important vehicle for
banking windfalls even given the growth of sovereign wealth
funds that invest through capital markets.
The study showed that since 2001 more than a quarter of
gross capital outflows from oil exporters has been in the form
of deposits at mostly industrialised country banks within the
remit of the Bank for International Settlements forum.
The difference today is that these deposits are coming
largely from the likes of Russia, Libya, Nigeria and Angola.
Middle Eastern oil exporters have made little use of bank
deposits this time around.
The study also showed that banks in BIS reporting countries
lent on almost half of deposits received from oil exporters to
emerging market economies.
Since 2001, more than half of new net emerging market loans
have gone to emerging Europe and started to pick up markedly as
early 2002, well before other regions. Over the whole period, a
bit less than a third went to emerging Asia and a little more
than a sixth to the Middle East and Africa.
The study also pointed out that in 2007, as the credit
crisis in industrial countries began to take hold, there were
indications of a shift in investment strategies that boosted
bank lending to emerging markets even more.
"An unwinding of global imbalances -- including through a
drop in oil prices -- could entail substantial risks for some
emerging markets by drying up sources of funding to the extent
that banks cannot replace petro dollars with other sources,"
Wiegand wrote.
Although a falling oil price would have offsetting benefits
in terms of trade for oil-importing countries, the study said
credit risks were still significant for deficit countries of
eastern Europe.
"In contrast to the 1970s and '80s, the bulk of vulnerable
countries is not Latin America but in Emerging Europe."
(Editing by Stephen Nisbet)
