Pricey oil is making emerging markets’ tough year even tougher, and the pain could spread wider this time round.
Brent crude notched its highest close since 2014 Monday, moving decisively above $80 a barrel for the first time since the 2015 commodities meltdown. That’s bad news for Asia’s big importers of oil and capital, such as India and Indonesia—but also for two countries usually well-equipped to deal with expensive energy.
At first glance, the Philippines looks well insulated: It ran a current-account deficit of just 0.6% of gross domestic product in July, according to Nomura, against 1.9% for India and 2.3% for Indonesia.
The problem is that the economy is already running very hot. August inflation was 6.4%, the highest in nearly 10 years and up from just 3% as recently as December, and growth exceeds the sustainable rate, argues Udith Sikand, senior emerging markets analyst at Gavekal. When it notches downward again, the currency is likely to take a hit, especially if inflation stays high. Currency speculators haven’t yet punished the Philippines as harshly as India or Indonesia.
Rising oil prices may make the Philippine economy harder to steer. Photo: arcel valderrama handout/epa-efe/EPA/Shutterstock
China is also in a sticky spot. Inflation is ticking up there too, just as policy makers are looking to offset the hit from higher U.S. tariffs and a crackdown on shadow banking at home. Loosening monetary policy is riskier with oil prices moving higher, especially since a new bubble is already inflating in real estate.
As China imports more and more services, its own current-account surplus is narrowing—to just $5.8 billion in the second quarter, compared with around $70 billion three years earlier. Pricey oil could take another chunk of that just as the next tranche of U.S. tariffs hits.
All of that means more pressure on the yuan, which will make life tougher for other emerging markets, whether they compete with China for exports or sell it iron ore and copper.
Asia has weathered a slowing China well so far, in part thanks to strong demand growth at home. But a mix of costlier oil, a fragile yuan and rising U.S. interest rates makes for an increasingly toxic cocktail. Investors going bottom fishing should have a life jacket at hand.
Write to Nathaniel Taplin at [email protected]