Turning Oil Tide

Turning oil tide: Price surge, currency woes and strong dollar piling pressure on emerging economies

A rise in oil prices to four-year highs is heaping pressure on big emerging-market crude consumers such as Turkey, India, Indonesia and South Africa that are already grappling with current account deficits, weak currencies and rising inflation.

Emerging markets worldwide have been buffeted in recent months by the strong dollar, climbing US interest rates and slowing growth momentum with Turkey and Argentina descending into full-blown currency crises.

Meanwhile Brent crude prices have risen above $80 a barrel, thanks largely to coordinated production cuts by some of the world’s biggest oil exporters, as well as impending US sanctions on crude exporter Iran that could wipe yet more supply off the market.

Some analysts now think benchmark prices could return to $100 a barrel for the first time since 2014. But for a number of importers like India, Turkey or Indonesia – who have all seen their currencies tumble to record lows this year – oil is already more expensive now at $85 a barrel than it was back in 2008 when the price hit a record $147.

Rising oil prices spell trouble for emerging markets, said Jim McDonald, chief investment strategist Northern Trust, an asset management firm with $1.1trn under management.

“Look at the largest market cap countries … every one of them is an oil importer,” said McDonald. “High oil prices are bad for them, unless it is tied to growth being really good – today what is driving oil prices higher is not a pick-up in growth, it’s a supply slowdown, and that’s a bad scenario.”

Trouble is especially on the cards for those economies hit by the triple-whammy of a sharp currency drop, heavy reliance on dollar-denominated energy imports and external funding flows. While China, India, Thailand, Turkey, South Africa and Indonesia top the list of biggest emerging market oil importers, Thailand enjoys a solid current account surplus and China only edged into a rare deficit in the first half of the year.

However, Turkey, Argentina, India and Indonesia find themselves high up on the list of countries featuring large current account deficits as a percentage of GDP, according to forecasts by the IMF for 2018.

For many countries, the pressure is twofold: rising crude imports with rising prices. China, India, Indonesia, Thailand, Turkey and South Africa imported 18pc more crude oil in July 2018, the last month for which complete data is available, than they did in January 2017. The average cost of their oil imports in their respective currencies, however, has risen by an average of nearly 60pc in that time.

Analysts are also closely watching how another oil shock might affect countries import cover and the adequacy of central banks’ foreign currency reserves.