Emerging markets suffer blitz of low commodity, oil prices
January 27, 2016, 1:16 am

Plummeting oil prices are hurting emerging economies already reeling from a lack of demand in commodities markets [Xinhua]

A World Bank report – the Commodities Market Outlook – released on Tuesday also warned that “further economic slowdown in major emerging economies could push commodity markets lower”.

While capital outflow from emerging markets has been the story of the latter half of 2014 and all of 2015, this year’s biggest hurdle for these former investment goldmines remains the price of oil.

In 2015, the exit of foreign investment led to fewer commodities being exported. That was exacerbated by the fact that China – major consumer market for commodities from emerging economies – was curbing its appetite for imports and buying less.

As a result, many emerging markets entered a dark period of currency devaluation; over the past year, currencies in emerging markets have plummeted, some by more than 50 per cent devaluation – as the US dollar just kept gaining strength.

This meant that import of foreign goods was now much more expensive.

For emerging markets that heavily rely on the export of oil as a chief commodity, the picture was much worse.

Venezuela, Indonesia, Russia and a few Central Asian energy-reliant economies have suffered considerably as oil prices fell, leading to lower currencies and a flight of foreign capital from their markets.

In a perfect Catch-22 scenario, the lower oil prices go, the weaker these economies get. The weaker they get, the less of an appetite they have to import commodities and ultimately the price of oil is pushed even further down.

The current downward trends become even more significant when one considers that emerging economies have for the past 15 years been the dynamo fueling commodity demand growth.

Oil prices have hovered between $26 and $34 a barrel for both US and international benchmark crude in the past five weeks. That range equates to an 85 per cent drop in oil prices since 2013.

Tuesday’s World Bank report paints an even more bleak picture for these markets in 2016.

“The World Bank is lowering its 2016 forecast for crude oil prices to $37 per barrel in its latest Commodity Markets Outlook report from $51 per barrel in its October projections,” it said in a press release accompanying publication of the report.

The report indicated that while oil prices fell by 47 per cent in 2015 and are “expected to decline, on an annual average, by another 27 per cent in 2016,” a gradual recovery is expected later in the year.

However, the World Bank warns that despite some increases in commodity prices by 2018, the general outlook is that considerable downside risks will likely persist.

“A faster-than-expected slowdown in major emerging markets economies – especially if combined with financial stress – could further reduce commodity prices considerably, setting back growth in commodity exporters and the global economy,” the World Bank’s Commodity Markets Outlook report said.

The International Monetary Fund’s chief Christine Lagarde repeatedly warned as such last year, but also added that some recovery is expected.

Why? Well, major investment firms believe that emerging markets are about to reach bottom and will turn the corner from a three-year drag which reversed their honeymoon growth rates in the wake of the 2008 US subprime mortgage financial crisis.

“There is the prospect of improved growth and better returns, even if it is not a rerun of the roaring 2000s,” a Goldman Sachs investment report said last November.

But hopes for even a small “rerun” will be dashed if oil prices fall below $20, as Goldman Sachs also forecast, and if capital outflow from emerging markets continues at a faster rate in 2016.

The BRICS Post with inputs from Agencies