The intuitive impact of falling oil prices is that it’s a hammer blow for producers and a gift for countries that are net importers. There is obviously some truth in this. Saudi Arabia, for example, is having to take drastic action to cut its fiscal deficit, while Venezuela is in crisis, with chronic shortages of basic everyday goods.
But as we have written before, falling oil prices also impose discipline on sovereigns who were previously able to use a torrent of petrodollars to cover up economic, political and social fractures. And conversely for emerging market importers, the benefit of lower oil costs is likely far outweighed by the broader carnage created by a collapsing energy industry, reversing petrodollar flows and the decreasing appetite for risky EM assets.
In a note on Monday, Citi’s head of emerging market economics David Lubin carries that beacon further still:
Oil importers are obviously enjoying a terms of trade gain which shows up on the current account of the balance of payments, but that gain doesn’t necessarily support growth. Take India and Turkey, for example: two countries where, two years ago, fears about external instability were at the forefront of investors’ minds. The fall in the oil price has helped to evaporate those fears. Turkey’s non-oil current account balance is once again in surplus, and overall deficit in the first 11 months of 2015 stood at US$28bn, compared with US$40bn a year earlier. In India, the current account may well be in surplus during the current quarter, and the overall deficit for fiscal 2015/16 is likely to be just US$18bn, or 0.8% GDP.
The argument here, broadly, is that while oil exporters have a primary problem that can be taken care of by pulling relatively straightforward fiscal levers, oil importers face a rather trickier problem: achieving growth when global investors are racing to pull their money out of emerging markets. Although the capital flow problems affect both oil importers and exporters, the latter have more reliable fiscal policies. “While oil falling oil prices are undeniably bad news for oil exporters … the policy discipline that’s evident among some of these countries can help to put some kind of floor under their vulnerability,” says Rubin. From the note again (our emphasis):
The current account isn’t all that matters. If capital flows are threatened by a declining availability of Petrodollars, that would constitute a threat to growth. In both of these countries, the source of investors’ concerns has shifted in recent quarters from a concern about external vulnerability (well, actually that concern is still reasonably valid in Turkey’s case!) to a concern about growth.
Figure 9 illustrates the problem in Turkey, where credit growth is in a state of collapse: the 13-week moving average annualised growth rate of credit in fx-adjusted terms is now 10%, compared to 20% during the first half of 2015. It is probably no coincidence that this collapse in credit growth is taking place alongside a collapse in net capital inflows: the sum of FDI and portfolio flows is now negative3. In India, investors’ concerns these days have less to do with vulnerabilities in the balance of payments, and much more to do with the sense that the underlying economy is much weaker than is suggested by strong headline GDP growth numbers. So the positive terms of trade shock that these countries are enjoying is failing to do much to support growth. All in all, we believe it isn’t enough for a country to be enjoying a smaller current account deficit if the capital account is being threatened by weak global risk appetite, which we think is reinforced by a Petrodollar shortage. Moreover, while oil exporters are demonstrating some notable commitment to fiscal discipline, this isn’t so obviously true of oil importers. Turkey’s recently published Medium Term Programme promises fiscal loosening. And India’s budget next month is widely expected to produce a deficit larger than the 3.5% GDP that had been promised earlier.
It seems that “whatever oil importers gain from the weaker oil price seems to be offset by a decline in risk appetite,” says Rubin. In short, what the falling oil price giveth to emerging markets with one hand, it taketh away with the other.
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