Commodity prices have increased sharply over the past ten years. Large populous emerging economies, first and foremost China, have become major consumers of commodities as they build out their infrastructure, their per capita income and nutrition patterns change and their populations become more mobile and thus consume more energy. Time will tell whether we currently find ourselves in the midst of a commodity super-cycle, or not. Either way, it is worth and prudent to ask which emerging markets would be the most sensitive to a sustained drop in commodity prices.
As far as the balance of payments is concerned, it is evident that Russia (negatively) and Korea (positively) are the two EM that would be most affected by a decline in commodity prices. Whether one looks at it in terms of the share of commodities in total exports or in terms of net exports, the same picture emerges. Russia is the one country among the EM-10 most sensitive to a decline in commodity prices, followed by Indonesia, Brazil, South Africa and Mexico. Russia’s net commodity exports amounted to almost 20% of GDP in 2011. While Indonesia and Brazil also rely on commodity exports, their lower degree of overall openness and lower net commodity exports renders them less sensitive to swings in commodity prices. Concentration measures of exports by product and country paint a roughly similar picture. Russia is the EM-10 most heavily concentrated in terms of its export profile, followed by South Africa, Indonesia and Brazil.
Furthermore, the price of energy has increased the most among the major commodity classes. This may or may not point to greater price risk going forward. It is certainly true, however, that both Brazil and Indonesia, while reliant on commodity exports, have a significantly more diversified commodity export base than Russia. In Brazil, for instance, this base consists of iron ore, soy, sugar, poultry and crude oil. Again, Russia is by far the EM most susceptible to a decline in commodity prices.
The net commodity importers, on the other hand, would benefit from a decline in commodity prices: Korea and Turkey would stand to benefit the most from lower commodity prices. In fact, Turkey’s entire external deficit is pretty much accounted f or by net commodity imports (especially energy). Improving terms of trade (aka lower commodity import prices) would tangibly improve the outlook for the current account. China, India and, less so, Poland would also stand to benefit from softer commodity prices.
At present oil prices, Russia will run a current account surplus in 2013-14. Russia’s non-energy current account deficit is around 15% of GDP. Assuming inelastic import demand, a 20% drop in oil prices sustained would quickly push the current account into deficit towards 3% of GDP. Susceptibility is not the same as vulnerability, of course. After all, the capacity to raise financing or the ready availability of liquid foreign assets can greatly mitigate even a severe current account shock. Moreover, how vulnerable a country is will also depend on the pre-shock financing metrics.
In terms of gross financing requirements relative to FX reserves, Russia benefits from a very solid position. Thanks to more than USD 500bn of FX reserves, Russia could easily finance a current account deficit of 3% of GDP. Even if short-term debt as well as debt amortisations are taken into account, external financing requirements (EFR) are very small compared to FX reserves. The international liquidity ratio (ILR), which captures short-term external debt plus non-resident holdings of domestic government plus debt amortisations relative to liquid foreign assets (central bank and commercial banks’ assets), paints a very similar picture. Only China with its USD 3.4 tr worth of FX reserves and minimal non-resident holdings of domestic debt has more favourable EFR and ILR ratios.
As far as the governments’ reliance on commodity-related revenues is concerned, Russia would also be the EM most directly affected by a general decline in commodity prices. Russia’s non-oil fiscal deficit is equivalent to 10% of GDP. However, the reliance on oil revenues is significantly mitigated by the existence of more than 8% of GDP worth of fiscal reserves the government could draw on to finance shortfalls if energy prices collapsed. (Naturally, if oil prices were to remain depressed for long, the government would soon be forced into a longer-term fiscal adjustment.) Last but not least, gross government debt is very low at 12% of GDP and the IMF estimates the net financial worth of the Russian government to be more than 20% of GDP (financial debt minus financial assets). In short, it would require a multi-year downward movement in the energy price cycle for the Russian government’s net worth to erode.
In Brazil and South Africa as well as in Indonesia, by comparison, natural resources companies are largely owned by the private sector, even if the government in some cases receives dividends as a major shareholder (e.g. Brazil) and benefits indirectly from higher commodity prices via corporate taxes. In Indonesia, oil- and gas-related revenues make up 3% of GDP, significantly less than in Russia. In Brazil and South Africa, the direct and indirect reliance on commodity-related revenues is even smaller. The degree of dependence of these three countries is therefore in no way comparable to Russia. Interestingly, the Mexican government, only barely a net commodity exporter, would be significantly more vulnerable to a prolonged downturn in oil prices given that around 1/3 of government revenues stem from the state-owned oil company and that, unlike in Russia, the government’s fiscal reserves (aka oil savings fund) are very small.
