EM forecast update: Oil on troubled waters or fuel for the fire?
Oil’s decline has a mixed impact on the BRIC economies, with Russia an obvious loser. While we see inflation falling in India and China, the growth benefit is limited, and Brazil’s faces a myriad of domestic problems. Meanwhile, the Federal Reserve (Fed) interest rate hike looms and emerging markets still look vulnerable.
Concerns have been building recently about emerging market (EM) vulnerabilities in the event of a Fed rate rise. The danger is that a hike, particularly if it comes earlier than the market expects, could trigger EM corporate defaults and economic slowdown, if not crisis. We do not believe the summer will see a 1998-style EM-wide crisis, but certain countries (e.g. Turkey and South Africa) are at particular risk.
China – oil eases the path of reform
The growth outlook for China is unchanged (6.8% in 2015 and 6.5% in 2016) as we do not believe the economy will reap the full benefits of lower oil prices. Instead, we expect the government to use the oil price falls to reduce subsidies. We have lowered our inflation forecasts given a combination of oil price profile, economic overcapacity and moderating domestic demand. We continue to expect monetary easing in the form of cuts to the reserve requirement ratio (RRR).
Brazil – something is rotten in the state of Rio
We have downgraded our growth outlook for Brazil on the back of the growing Petrobras scandal and greater-than-expected fiscal consolidation plans. There is also a downside risk posed by possible water shortages (Brazil is suffering its worst drought in 80 years), which could prompt electricity rationing. Meanwhile, we have increased our 2015 inflation forecast due to the one-off impact of electricity tariff increases and pass-through from the continuing currency weakness. We expect further rate hikes from the central bank before the current cycle comes to an end, but then believe we could see cuts in the second half of the year as growth sours markedly.
India – waiting for reform
A significant upward revision to growth sees India outpacing China in economic growth – Modi works fast! Sadly though, this is the result of a change in GDP calculation rather than due to a raft of successful reforms, which have so far been lacking (although sentiment remains positive). Investment growth remains weak, and it will take a real, rather than accounting, change to remedy this situation. Oil has also helped drive down inflation and we expect interest rates to fall to 7% by the third quarter.
Russia – oil creates a slippery slope
A weaker oil price is, unsurprisingly, bad news for Russia. As well as contributing to currency weakness and a worsening current account position, it reduces the scope for fiscal support for the economy. 2014’s budget assumed a $114 per barrel price – 2015 will have to see substantial cutbacks. Combined with sanctions and still high tensions in Ukraine, we have turned more negative on the country’s growth outlook, particularly in light of the move in the oil price since we last published our forecasts. We now expect GDP to contract by 4.9% in 2015 and by 0.4% in 2016 with inflation higher at 13.4% in 2015.