India, along with other emerging economies like Turkey and the Philippines, will be a loser if the recent oil price rise continues, according to a Nomura report.
The supply side-driven increase in crude oil prices is likely to spur a major differentiation in emerging markets’ performance, hurting large net oil importers with weak economic fundamentals, possibly by more than it benefits large net oil exporters, the brokerage said.
Turkey and Ukraine, with high inflation and large twin deficits, appear to be the most at risk of a vicious spiral from a continued rise in oil prices while India, Cambodia, Pakistan, the Philippines, Sri Lanka and Romania are also susceptible, albeit to a lesser extent.
For India, the rising oil prices risk reversing the improving economic fundamental ‘sweet spot’ experienced during 2014-16, at a time when there are heightened market concerns over pre-election populist government policies, the costs of cleaning up the banking sector and the lack of progress in rejuvenating private investment, Nomura said.
Worsening CAD
“We estimate every $10/barrel (bbl) rise in oil price would worsen the current account balance by 0.4% of GDP, increase inflation by 30-40 basis points (bps), hurt growth by 15 bps and worsen the fiscal balance by 0.1% of GDP. For instance, if Brent oil averages $75/bbl sustainably in 2018, we estimate the current account deficit would widen to 2.5% of GDP in 2018 from 1.5% in 2017,” said the brokerage.
The clear cut winners from the rise in oil prices include exporters Saudi Arabia, Nigeria and Colombia.
Additionally, rising inflationary risks would push the Reserve Bank of India to hike cumulatively by 50 bps in H2 2018 against the current base case of no change. “In fact, the economic effect could exceed our estimates, as the government could decide against raising petroleum product prices in the year,” Nomura said.
