Falling Commodity Prices Hurt Emerging Economies

Diep Nguyen

13:44 16/10/2019

BizLIVE -

Following a strong rebound at the start of the year, in August, capital flows to emerging markets saw the biggest monthly outflow since late 2016.

Falling Commodity Prices Hurt Emerging Economies
Emerging Developing Economies (EMDE) financing conditions have been volatile. Despite low international borrowing costs, demand for EMDE assets cooled substantially on trade and policy uncertainty, heightened volatility at the global financial markets, renminbi depreciation, and slowing global activity. 
Following a strong rebound at the start of the year, in August, capital flows to emerging markets saw the biggest monthly outflow since late 2016. Equity prices and currencies weakened across EMDEs, while Argentina—where currency depreciated by almost 30 percent and equity markets fell by over one-third since July—had to impose capital controls and defer debt repayments to stem capital flight. 
Nevertheless, a shift toward a more accommodative policy stance in the United States helped contain the appreciation of the U.S. dollar and allowed several large EMDEs with subdued inflation to cut policy rates in the second half of 2019.
The prices of most commodities fell in 2019, reflecting the deterioration in the global growth outlook.
Commodity markets have been volatile, especially during periods of escalating trade tensions. Oil prices rose in the first half of 2019, supported by supply constraints as OPEC and its partners, including Russia, agreed to extend their production cuts. Supply concerns have been exacerbated by geopolitical tensions in the Middle East.
In the second half of the year, supply issues have been outweighed by concerns about slowing global growth and growing trade tensions, resulting in prices trending downward, with Brent falling below US$60/bbl. More recently, oil prices posted a sharp temporary increase due to fears of a prolonged supply disruption following attacks on an important oil processing center in Saudi Arabia.
Oil prices are forecast to decline slightly from 2018 levels, to an average of US$60/bbl in 2019 and 2020. Similarly, supply bottlenecks for metals, including copper, nickel, lead, and zinc, supported prices in the first half of 2019. 
Although iron ore prices have continued to rise amid ongoing supply concerns, other base metals have declined, partly reflecting the re-escalation of trade tensions. Prices for copper dropped to a two-year low and soybean prices also fell following renewed trade tensions between the United States and China. 
In contrast, other agricultural prices, particularly grains, rose on worries that poor weather for some major producers may reduce harvests, but fell in the second half of 2019 amid improved conditions, balancing ongoing trade concerns. Agricultural prices are forecast to remain broadly flat in 2020.

DIEP NGUYEN

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