Three of the so-called ‘fragile five’ would be among the worst hit countries if unrest in Iraq sparks another spike in oil prices, Capital Economics has claimed.
Chief emerging markets economist Neil Shearing said the group’s forecast is for prices to drop back to below $100 per barrel by the end of the year, in part due to increased supply from the rest of the Middle East.
But if prices do spike beyond current levels, vulnerable markets such as Turkey, South Africa and India would find themselves in the eye of the storm.
The ‘fragile five’ – Brazil, India, Indonesia, South Africa and Turkey – have been identified because of their high current account deficits and are expected to be particularly hit by the US’s move to reduce support for its economy.
“In simple terms, the big winners would be energy-surplus countries that export more than they import, including the Gulf economies, but also parts of Africa (Nigeria), Latin America (Venezuela and Colombia) and emerging Europe (Russia),” he added.
“In contrast, the big losers would be emerging markets with large energy deficits. This covers most of Asia (notably Singapore, Korea, China and India), as well as central Europe (Poland, Hungary and the Czech Republic), parts of Latin America (Chile), Turkey and South Africa.”
While this analysis offers a useful starting point, Mr Shearing said the reality is more complicated: a period of higher oil prices would not necessarily lead to faster growth in energy-surplus countries.
“The crucial factor is whether the additional revenue from oil exports is spent or saved,” he said.
“If saved – as would be likely in the Middle East – the net result would be a larger current account surplus rather than faster growth. If the windfall is spent, as is more likely in countries like Venezuela and Russia, the key issue becomes the degree of slack in the domestic economy.
“For countries operating below full employment, output can rise in response to the additional spending. But if spare capacity is limited – as is the case in both Russia and Venezuela – rising demand is more likely to result in higher inflation than faster growth.”
For energy-deficit emerging markets, Mr Shearing said the key thing to look at is the starting point of the overall current account balance.
With countries that already run a large current account deficit, a spike in oil prices would increase existing strains in the balance of payments and could pose a threat to wider macroeconomic stability.
“Ukraine looks particularly vulnerable in this regard but so too does Turkey, South Africa and India – economies singled out due to current account concerns during last year’s emerging market sell-off,” he added.
“In contrast, while Singapore and Korea have large energy deficits, both run large current account surpluses. The underlying strength of their balance of payments would enable both countries to weather the storm were oil prices to jump once again.”