Emerging markets performance tied to oil price surge, says Nomura

Rising oil prices and higher US yields will exert pressure on the rupee

If the crude oil prices continue to go up, there could be variations in the performance of emerging markets (EMs). Markets such as Saudi Arabia, Brazil and Russia could gain at the expense of oil importers such as India, the Philippines and Indonesia.

“If the recent oil price rise continues and is more supply-side driven, we would expect it to drive major differentiation in EM performance, hurting large net oil importers with weak economic fundamentals, possibly by more than it benefits large net oil exporters,” said Nomura, in a April 25 note. “The clear-cut winners include Saudi Arabia, Nigeria, Colombia and Malaysia, and losers are Turkey, India and the Philippines.”

Currently, Brent crude oil trades at $74 a barrel, up 20 per cent from their February 2018 lows and 68 per cent since June 2017.

Rising oil prices and higher US yields will exert pressure on India’s current account deficit and the rupee, says Nomura.

Already, the rupee is one of the worst-performing currencies this year. On a year-to-date basis, the rupee is second-worst performing among all Asian currencies against the dollar, having declined 4.3 per cent. On a one-month basis, the rupee is down 2.83 per cent against the dollar, second-most among Asian currencies after Japanese yen.

“Rising oil prices risk reversing the improving economic fundamental ‘sweet spot’ experienced during 2014-16, at a time when there are heightened market concerns over pre-election populist government policies, the costs of cleaning up the banking sector and the lack of progress in rejuvenating private investment,” says Nomura.

OIL ON THE BOIL 
 

Winners
 

Saudi Arabia

Nigeria

Colombia

Malaysia 

Brazil

Russia

Venezuela 

Losers
 

Turkey

India

Philippines

Chile

Indonesia
Peru
Romania

Thailand

According to its estimate, every $10 per barrel rise in oil worsens the current account balance by 0.4 per cent of gross domestic product (GDP), increase inflation by 30-40 basis points (bps), hurt growth by about 15 bps and worsens the fiscal balance by 0.1 per cent of GDP. If Brent crude oil continues to averages $75 a barrel, Nomura says India’s CAD would widen to 2.5 per cent of GDP in 2018, from 1.5 per cent in 2017. Additionally, rising inflationary risks would push the Reserve Bank of India (RBI) to hike cumulatively by 50 bps in the second half of 2018.

Nomura says the effect would be even worse if the government decides against raising petroleum product prices ahead of the general elections.  

“India’s exposure to oil prices is most prevalent in the external sector, while inflationary risks are also significant,” it says. “However, India’s fundamentals (growth, inflation, twin deficits, reform outlook) are in a much better position and its forex reserves (at over 10 months of import cover) are much higher than in 2013, so the RBI has the wherewithal to defend the currency,” it added.