The recent drop in oil prices is changing the risk profile of Emerging Markets (EMs). Significant adjustments to global financial markets in the second half of 2014 include a large drop in commodity prices, the end of Quantitative Easing ( QE ) in the US, and a stronger US dollar. These developments, particularly the drop in oil prices, have led to a divergence in EM performance and risks going forward. At this juncture, the most exposed countries are Russia and Ukraine, followed by other commodity producers like Brazil and South Africa.
We have previously identified the EMs most at risk of a balance of payments crisis (see our Economic Commentary dated 6 June 2014). This analysis focused on the Fragile Five (Brazil, India, Indonesia, South Africa and Turkey) EMs that were most severely impacted by the capital outflows following the announcement in mid-2013 of the QE tapering by the US Federal Reserve (Fed). We now have added Russia and Ukraine to our list of EMs that face a material risk of a crisis (owing to the fallout between the two countries as well as the recent drop in oil prices) to make up the so-called Suspect Seven.
Overall, the second half of 2014 has resulted in a significant EM differentiation between those markets that have been able to take the necessary measures to reduce their current account deficits and stabilize their currencies (India and Indonesia) and those that are still struggling to contain the loss of confidence in their economies (Brazil, Russia, Ukraine and to a lesser extent South Africa). Much of the loss of confidence in the latter group has been driven by lower global commodity prices, including oil.
Source : Qatar News Agency
