Mon, Dec 07, 2015 page15

• ‘Fragile Five’ recover as risks mount for ‘Gulf Six’

  OIL EFFECT: Falling crude prices eased the burden on energy-hungry developing economies, while exporters of the valuable resource saw their incomes plummet

  • Reuters, LONDON
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  Emerging economies not long ago deemed at risk of crisis are seeing steady balance of payments improvements, while for oil exporters in the Gulf and elsewhere once-mighty cash surpluses have all but melted away.

  The so-called taper tantrum of mid-2013 unleashed a wave of selling of assets from developing countries, whose big funding or current account deficits left them vulnerable to the withdrawal of cheap money resulting from a slowdown, or taper, in the rate of US money printing.

  With oil prices at the time staying above US$100 per barrel, these tended to be fast-growing energy importers such as India and Turkey, which, along with Indonesia, Brazil and South Africa, were lumped together as the “Fragile Five” economies.

  

  A general view of the Doha City Center shopping mall in Qatar on Nov. 24.

  Photo: AFP

  However, thanks to the halving of oil prices since the middle of last year and sharply weaker exchange rates, gaps are narrowing.

  India’s deficit has shrunk to 0.9 percent of annual economic output this year, according to data compiled by JPMorgan Chase & Co, while Ukraine should post a surplus versus an 8 percent gap in 2012.

  Others have improved less, with Turkey running a 5.2 percent deficit this year and Brazil, despite economic recession, seeing a bigger deficit than in 2012 at 3.4 percent.

  “Lower oil prices are clearly helping to move trade balances so this is positive,” UBS strategist Manik Narain said.

  “However none of the current account improvements have come through stronger exports,” he said.

  “Governments have inflicted a lot of pain on domestic demand to get the current accounts under control,” Narain added.

  However, if oil and currency adjustments are shrinking some deficits, commodity-reliant countries with fixed exchange rates are seeing the opposite.

  Venezuela’s 2.9 percent surplus in 2012 for instance has swung into an 8.1 percent deficit.

  There are also dramatic declines in the Middle East, where the six Gulf Cooperation Council (GCC) countries are to run a 3.8 percent surplus this year — down from 22 percent in 2012 and 13.2 percent last year.

  Oil earnings this year for the bloc comprising Saudi Arabia, Kuwait, Qatar, Oman, Bahrain and United Arab Emirates would be US$275 billion less than last year, according to the IMF.

  Moreover, all GCC currencies except Kuwait peg their currencies tightly to the US dollar. So with little relief on the exchange rate front, governments would need to slash budget spending to dampen import demand.

  Jason Tuvey, who is a Middle East economist at Capital Economics, said that the headline surplus is down to Kuwait and Qatar, which mask a Saudi deficit of as much as 7 percent of GDP.

  Smaller Oman and Bahrain have even bigger funding gaps.

  While some economists acknowledge that governments would have to loosen currency pegs, Tuvey reckons spending cuts are more likely, saying that Saudi Arabia reacted to the 1980s oil price collapse by slashing capital spending more than 98 percent.

  “A repeat of this would wipe out the budget deficit and push the current account position back into a sizeable surplus,” he added.

  Other oil exporters that allowed their currencies to weaken have fared better over the past years, with Russia’s surplus at 5 percent of GDP compared with 3.5 percent in 2012.

  Malaysia’s surplus has halved since 2012, but with the ringgit almost 30 percent weaker since the taper tantrum, there might be signs of a turnaround — imports are contracting and data on Friday showed exports growing twice as fast as expected, rising 16.7 percent from a year earlier, increasing for a fifth consecutive month.
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