Nomura

Higher oil prices drive EM divergence

A continued rise in oil prices would divide the emerging markets (EM) universe by economic performance.

There are two main reasons for this. First, the economic impact of higher oil prices is felt much more in EM than in developed markets (DM). Due to the size of a country’s economy, the majority of oil-producing and consuming countries are in EM, where they are also more energy intensive and less energy-efficient than their DM counterparts. Second, there is the asymmetric impact a rise in oil prices would have on EM economies, where the macroeconomic cost to large net oil importers with weak economic fundamentals can be disproportionately larger than the macroeconomic benefit to net oil exporters. Below, we explain this asymmetry and assess the impact of sustained oil prices on 26 EM economies by classifying them into winners, losers and those in between.

Though it is difficult to determine the demand and supply factors that contribute to oil price moves, it is important to understand what drives the rise in oil prices. Two of the reasons are the synchronized global growth expansion, despite having softened recently, and more dominantly, market concerns over supply.

A supply-side driven rise is more likely to drive an economic wedge between oil importers and oil exporters. For importers, this is prevalent in EM Asia, Turkey and parts of EEMEA because, in the absence of a strong pick up in exports, the higher import cost of oil would worsen current account positions, compress profit margins and raise CPI inflation.

For large net oil exporters, demand and supply driven factors bear less weight than for net oil importers. However, the benefits can be substantial. Big EM oil exporters, such as Latin America and the Middle East, reap a significant increase in commodity export revenues, improving current account fiscal positions and increase profits in the energy sector, potentially leading to strong capital inflow and sovereign credit rating upgrades.

For more details about the potential impacts of rising oil prices on EM economies, click here.

Related report – Anchor report: Oil price moves: A big EM differentiator, November 2017

Contributors

  • Rob Subbaraman

    Head of Emerging Markets Economics and Head of AEJ Fixed Income Research

  • Sonal Varma

    Chief India Economist

  • Young Sun Kwon

    Senior Economist Korea, Taiwan and Hong Kong

  • Euben Paracuelles

    Southeast Asia Economist

  • Inan Demir

    Senior EEMEA Economist

  • Benito Berber

    Senior Strategist, Americas

  • Craig Chan

    Global Head of EM Strategy

  • Henrik Gullberg

    Senior EM Strategist

  • Mario Castro

    Strategist, LatAm FX/rates

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