Emerging Markets’ Commodity Gains Quickly Unwound


A number of key economic and financial ratios in commodity-based emerging markets (CEMs) have already returned to pre-boom levels, two years after the sudden end of the commodity boom. The speed of the change, and size of the declines in fiscal and export receipts, suggest an extended period of adjustment ahead. Taking account of economic growth, fiscal performance and external finances since 2003, Bolivia, Peru, Azerbaijan and Cote d’Ivoire benefitted most from the boom among Fitch-rated CEMs, while Bahrain, Gabon, Venezuela and Suriname benefitted the least 1.

One of the market narratives at the height of the commodity boom was that, rather than being in the middle of a cycle, prices were either on the verge of an extended “super-cycle” or reflective of a long upward trend. It was a debated point, with implications for investors and policymakers. As prices have come down, the consequences of policy decisions during the run-up – based in part on how decision-makers interpreted the cycle – have begun to emerge.

Fiscal Deteriorations Due to Lower Revenue As Well as Higher Spending

Fitch rates 75 emerging-market sovereigns, 30 of which are commodity based (commodities account for at least 50% of current account receipts). Governments are typically the main beneficiary of higher commodity prices in CEMs, as the state tends to own or heavily tax commodity-producing assets. Governments are also affected by lower prices, however, and 2016 median CEM fiscal revenue is forecast to return to the 2003 level, at 23% of GDP.

The decline in CEM fiscal revenue since 2013 is equivalent to USD1.3trn (using 2016 forecasts), although USD736bn is accounted for by Brazil and Russia, where dollar-equivalent government receipts reflect the impact of large depreciations on non-commodity revenues denominated in local currency. CEM fiscal revenue excluding Brazil and Russia fell by USD599bn, with declines of 50% or more in Ahu Dhabi, Angola, Azerbaijan, the Republic of Congo, Gabon, Kazakhstan, Kuwait, Nigeria, Qatar and Saudi Arabia.

Previous spending increases that have not responded to lower revenue represent another factor contributing to recent fiscal deteriorations. Median government spending in CEMs has increased by about 5 percentage points of GDP since the mid-2000s, but it has been unchanged since 2012. In contrast, government spending in non-commodity emerging markets (NCEMs) increased by about 3 percentage points of GDP before 2012, and then declined by 2 percentage points of GDP, implying a stronger policy response even though they were not faced with the same dramatic revenue declines. The median fiscal balance for NCEMs has been roughly unchanged in recent years, while that of CEMs has moved from surplus to large deficit (see the Fiscal Balance chart).


Government debt is consistently lower in CEMs than in NCEMs (see the Government Debt chart), although the gap has narrowed substantially since 2014. Government debt has increased in every CEM since the end of the boom, with a median of 12 percentage points of GDP, more than double that of NCEMs. Current government debt levels are higher in a number of CEMs than in the pre-boom years – these include Angola, Bahrain, Brazil, Mozambique, Suriname and Zambia.


Current Account Deficits and Rising Debt Shape External Finances

There is a sound economic rationale for most EMs to run current account deficits, as investment needs typically exceed domestic savings at lower levels of income. Notable exceptions are found in emerging Asia where private-sector savings are high, and growth in recent decades has been led by merchandise exports, resulting in large trade surpluses. Current account surpluses in CEMs during the commodity boom can also be mapped to higher savings and exports, although in these cases it was public-sector savings (fiscal surpluses) and commodity exports, both benefitting from higher commodity prices.

A comparison of mid-2000s peaks with forecast 2016 troughs shows that the current account deterioration in CEMs is similar to the fiscal deterioration (see the Current Account chart). Fitch expects current account receipts (mostly merchandise exports) to have declined in CEMs by USD1.2trn (a 41% reduction) over 2013-2016. Nearly half of this is accounted for by Abu Dhabi, Russia and Saudi Arabia. Reductions of 50% or more are common among CEMs, with the biggest percentage declines in Abu Dhabi, Angola, and Venezuela.


CEM current receipts in dollar terms are equivalent to a decade ago, while NCEM receipts have doubled over the same period (see the Current External Receipts chart).


Current account deficits have resulted in increased gross external debt as a share of GDP for every CEM except Venezuela since 2013. Several factors have combined to limit non-debt external funding options, including the speed of the current account deteriorations, the lack of FDI in CEMs outside the commodity sector, and the change in global investor sentiment toward EMs more generally.

The deterioration has been slightly quicker on a net external debt basis (taking account of external asset holdings), and we forecast the median value for CEMs to move from a net credit to a net debt position in 2016. This reflects some CEMs’ use of official foreign exchange reserves to defend exchange rates (in Central Asia, for example), and others drawing on foreign assets rather than issuing debt to fund broader balance-of-payments pressures.

1 Based on average real GDP growth in 2003-2016, and comparing changes in government balances, government debt, current account balances and net external debt at the start and end of the period. Abu Dhabi, Kuwait and Saudi Arabia score poorly on this basis as well, but maintain strong external sector balance sheets.

Source: Fitch Ratings

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