 "Drop in oil prices changing risk profile of emerging markets")
The recent drop in oil prices is changing the risk profile of emerging markets (EMs), including India, according to a new research report.
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, the QNB Group report said.
These developments, particularly the drop in oil prices, have led to a divergence in EM performance and risks going forward.
Prime Minister Narendra Modi announced in mid-October that the government would stop fixing diesel prices, eliminating half of total fuel subsidies, which cost the government around 9.4% of the budget last year.
"We have previously identified the EMs most at risk of a balance of payments crisis. 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)," the report said.
"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," it said.
The improvement in financial market sentiment towards the Suspect Seven has occurred despite a steady downward revision in the outlook for these economies, with the main exception of India.
Real GDP growth is now expected to be 5.4% in 2014 up from 4.7% expected in June. Indonesia is the only other Suspect Seven expected to grow by over 5% in 2014.
Lower oil prices have been a key differentiator of EM performance during the second half of 2014. Brent oil prices peaked in mid-June at $115 per barrel. Since then prices have fallen over 30% to around $80 currently.
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, the QNB Group report said.
These developments, particularly the drop in oil prices, have led to a divergence in EM performance and risks going forward.
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Falling oil prices have helped improve external balances in India and Indonesia and their governments have also taken the opportunity presented by lower oil prices to increase fuel prices and reduce their subsidy bills, the report said.
Prime Minister Narendra Modi announced in mid-October that the government would stop fixing diesel prices, eliminating half of total fuel subsidies, which cost the government around 9.4% of the budget last year.
"We have previously identified the EMs most at risk of a balance of payments crisis. 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)," the report said.
"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," it said.
The improvement in financial market sentiment towards the Suspect Seven has occurred despite a steady downward revision in the outlook for these economies, with the main exception of India.
Real GDP growth is now expected to be 5.4% in 2014 up from 4.7% expected in June. Indonesia is the only other Suspect Seven expected to grow by over 5% in 2014.
Lower oil prices have been a key differentiator of EM performance during the second half of 2014. Brent oil prices peaked in mid-June at $115 per barrel. Since then prices have fallen over 30% to around $80 currently.