Oil prices have been falling in the context of rising oil supply rather than weak oil demand. The supply growth has come primarily from the U.S. shale patch, but OPEC supply has held up reasonably well despite the removal of Iran from world oil markets as a result of international sanctions. On the demand side, emerging markets oil demand continues to power ahead, whereas OECD demand remains in the doldrums (with U.S. demand rising and European demand falling).
Oil is integral to the global economy, and it has been expensive for much of the past five years. When its price falls as a result of excess supply, this is a reflationary impulse to growth, i.e. consumers of oil benefit more than producers lose. (A price fall caused by collapsing demand, on the hand is a deflationary signal, but that is not the case currently.)
Who are the potential winners from lower oil prices? Those economies who are net importers of energy, which in the EM equity universe comprises Asia ex-Malaysia, EMEA ex-Russia, along with Brazil, Chile and Peru. In terms of the immediate impact, the losers are Russia, Malaysia, Colombia, Indonesia and Mexico. That said, most of these economies (with the notable exception of Russia) are relatively well-diversified. Mexico and Malaysia also have very significant manufacturing-oriented export sectors which stand to benefit from better growth conditions. So the clear loser is Russia, in the EM equity context.
However, looking at debt exposure among all EM oil producers, a more granular picture emerges. Here, the issue is how much debt the private and public sectors have issued abroad, and how much flexibility they have (in terms of spare capacity) to buffer the impact of falling price by increasing their output. Falling oil revenues imply tightening liquidity and deteriorating credit conditions for debtors in these economies, whether they are public or private.
Viewed in this context, Russia stands out as vulnerable, but is no longer on its own, as it was in the equity universe.
Venezuela is the most exposed to price downside because of the relatively large size of its foreign debt as well as the internal political instability which may prevent it from bringing its spare production capacity on-line in response to falling price.
The UAE also raises alarm bells, in this case because most of the debt issuance is associated with Dubai, whereas the oil revenue which is the ultimate collateral is associated with Abu Dhabi.
Among smaller oil exporters, Azerbaijan and Kazakhstan also look particularly vulnerable.
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