As global markets shuddered in August on Chinese growth fears, the downward pressure on oil prices and a further depreciation of the Russian rouble continued to dominate the outlook for economies in the EBRD regions, according to a new paper from EBRD economists.
The price of Brent oil fell as low as $43 a barrel on 24 August against the backdrop of worries about Chinese growth. The rouble, keenly sensitive to oil price developments, briefly dropped to 75 to the dollar before settling back to around 65 to 70. It has depreciated by 16 per cent against the US dollar since the start of the year (Chart 1).
Plummeting Chinese share prices led to an increase in global market volatility, which had an impact on emerging markets generally. However, the timing of a likely increase in U.S. interest rates – a negative factor hanging over emerging market economies- is now likely to be delayed.
In the EBRD regions, commodity exporters have been the most immediately affected by the falling oil prices. In addition to the weakening of the rouble, the Kazakh tenge was floated on 20 August in anticipation of low oil prices. The new exchange rate regime and inflation targeting should help Kazakhstan’s economy to adjust more flexibly to changes in external environment.
“The weaker rouble may add to the pressure on currencies in the EEC region and Central Asia, given countries’ strong trade, investment and financial sector linkages with Russia,” the economists said.
Other countries remain vulnerable to an increased volatility of capital flows into emerging markets, in particular Turkey, where politicial uncertainty is adding to the problems of a a high current account deficit and significant levels of corporate debt denominated dollars.
The direct impact of a Chinese slowdown on Turkish trade was likely to be limited, as China accounts for only 1.8 per cent of Turkish exports.
Low oil prices would benefit Turkey, but that effect could bne offset by deteriorating investor sentiment towards emerging markets generally.
The economists said the Russia recession was deepening, even though the lower rouble may help exports. The Bank’s most recent forecasts of a contraction of 4.5 per cent this year and of of 1.8 per cent in 2016 still looked valid. With overall reforms stalling in the country, there would be negative consequences for long-term growth prospects.
In Ukraine, GDP fell by 17.2 and 14.7 per cent, respectively, in the in the first and second quarters of this year. Even though there are signs that the economy may have bottomed out in the middle of the year, the scale of the contraction in the first half and the continuing conflict in the east mean that the sigificant downside risks to the Bank’s latest 2015 forecast for Ukraine may be realised.
The report said countries in central and eastern and south eastern Europe had only limited direct links with China. But as other emerging markets gained competitiveness from depreciating currencies, the region would have to improve the quality of its products in order to maintain its market export share.
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The EBRD will publish its next set of economic forecasts on 5 November.
Chart 1. Changes in exchange rates against the US dollar
Source: Bloomberg and authors’ calculations.
Note: Negative values indicate depreciation against the US dollar.