Oil prices collapse to boost most emerging world’s economy

Baku, Azerbaijan, Jan. 28

By Aygun Badalova - Trend:

The collapse in global oil prices will provide a boost to most economies in the emerging world, analysts at British economic research and consulting company Capital Economics believe.

"However, it will come at the cost of weaker growth in the Middle East, and deep recessions in Russia and Venezuela. Accordingly, the net impact on overall EM growth is likely to be quite small," analysts said in a report obtained by Trend.

The big winners from the drop in oil prices will be those EMs with large energy import bills, which are mostly in either Emerging Asia or Central and Eastern Europe (CEE), according to the analysts. These economies will receive a boost to their incomes through an improvement in their terms of trade.

The impact on output (and thus real GDP) from lower oil prices will depend on whether it is governments or consumers who benefit, and whether the windfall is spent or saved, analysts believe.

"In most countries in Asia and CEE, fuel prices are determined by the market. In these countries, it will be consumers who benefit through lower inflation and an increase in their purchasing power," analysts said.

Analysts believe that there will also be indirect benefits from the fall in oil prices for net importers. "Lower oil prices should lead to an improvement in the balance of payments positions in EMs with big current account deficits, such as Turkey and South Africa, making them less vulnerable to a sudden stop in capital inflows," they said.

Emerging markets that are net exporters of energy will be the big losers. For these countries, what matters is the extent to which they have become reliant on high oil prices to sustain spending and thus demand, analysts said.

However, in a number of other EM energy exporters, the plunge in oil prices will exacerbate already existing economic problems, analysts believe.

"By far the largest of these is Russia, which is likely to experience a deep recession this year. The situation in Venezuela is, if anything, even worse. Not only will GDP almost certainly contract sharply, but a default on its foreign currency debt looks increasingly likely. Oil producers in Africa look vulnerable too," analysts' report said.

During Tuesday's electronic trading on the New York Mercantile Exchange the West Texas Intermediate (WTI) for March delivery increased by $0.62 to $45.43 a barrel.

March Brent, which is the benchmark price for products in Europe and Asia, increased by $0.43 to $48.37 a barrel on the London-based ICE Futures Europe exchange.

OPEC's secretary general, Abdallah El-Badri recently said that oil prices could rebound to $200 per barrel if investments in the oil sector dry up in light of current low prices.

Capital Economics' analysts expect oil prices to rebound, but not significantly.

"Increased demand for oil to store should support the spot prices of WTI and Brent. We expect the prices of both to rebound to $60 per barrel by the end of the year," Tom Pugh Commodities Economist at Capital Economics said in a report.

Aygun Badalova is Trend Agency's staff journalist, follow her on Twitter: @AygunBadalova

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