Oil Price Risks For EM Energy Importers

The rising likelihood of a US-led air strike on Syria has pushed up oil prices significantly . W e have decided t o raise our average 2013 Brent Crude price forecast upwards from US$ 106 /bbl to US$ 111 /bbl, with upside risks (at US$115/bbl currently, a move to US$120-125/bbl looks possible) .

Compounded with weakening currencies, several emerging markets could be hit hard by the rise in oil prices, which in many cases have risen to all-time highs in local currency terms. This d ynamic is exacerbating the difficulties that policymakers are already facing, and could result in a sharp pick - up in imported inflation in the coming months , par ticularly in countries such as South Africa , Argentina, Indonesia , Brazil and Turkey . The average increase in oil prices in local currency terms is currently running at 16.1 % year-on- year (y-o-y) for the ten countries in our sample .

Moreover, in countries such as Argentina, Turkey, India and Brazil, oil prices in local currency terms a re substantially higher than at the peak in dollar terms in July 2008, at the onset of the global financia l crisis. This will make the policy environment increasingly challenging as the threat of inflation may pressure central banks to raise interest rates at a time when the economy is slowing, and government fiscal accounts are becoming stretched as energy subsidies become increasingly expensive to finance. In addition , we highlight that governments could face significant political backlash if they try to raise taxes or reduce subsidies as was the case in Indonesia in June. Lastly, the balance of payments dynamics may prove increasingly untenable as current account deficits are put under pressure as the cost of imports rise s . Th ese dynamics suggest potential for a continued deterioration in macroeconomic outlooks for energy importers , and this, combined with an already difficult and volatile policy environment, as well as rising bond yields in the developed world , could see many investors remain on the sidelines for now.

Supply Side Inflationary Pressures To Mount
% Change Year-On-Year In Brent Crude Prices, Local Currency Terms

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