Tuesday / September 25.
HomeFT SelectCommodities rebound set to boost global growth

Commodities rebound set to boost global growth

Since the start of the 21st century the South American nation of Suriname, population 540,000, has been riding a commodity boom that yielded major benefits for a country rich in bauxite, gold, oil and bananas.

From 2000 to 2014, annual per capita income more than quintupled to almost $10,000. Child mortality fell by a third. A child born there today can expect to live to 70, up from 67 just 15 years ago.

In January, however, the government of former military ruler Dési Bouterse, who remained president following a democratic election last year, had to confront a harsh reality. After watching foreign reserves more than halve last year, it asked for help from the International Monetary Fund, the World Bank and other institutions, whose representatives are due to land in the capital city of Paramaribo next week.

With that move, Suriname set out on a path to an international bailout. More countries whose economies depend on exports of oil and other commodities may follow suit, punctuating the end of the “supercycle” that lifted their fortunes for years.

Asked recently what kept her up at night, Christine Lagarde, managing director of the IMF, says she worries about the fate of low-income oil producers like Nigeria.

“That’s a country that is facing, like many other oil-producing countries, a real hardship and a necessity to very promptly redesign its business model and realign its interests with a completely new reality which is here for longer than many think,” she said.

The concerns at the IMF go beyond the effect on budgets and growth and fears over a balance of payments crisis.

IMF economists warned this week that commodity price shocks could weaken banks in developing economies, raising the prospect of a commodity-driven financial crisis. Others worry about the impact on markets of oil-fed sovereign wealth funds selling down assets to cover for declining oil revenues.

Nigeria has so far avoided going to the IMF, though a growing number of analysts think it should. It is in discussions with the World Bank and other institutions about borrowing billions to plug a $15bn budget deficit left by falling oil revenues. Azerbaijan has also had discussions with the IMF and World Bank about a $4bn loan package.

There are concerns inside the IMF and World Bank that others, like Ecuador and even Venezuela, could be seeking bailouts before long. Across Africa some observers foresee low-income oil producers from Angola to Gabon being forced into bailouts.

Major emerging economies like Brazil and Russia seem safe for the time being thanks to their foreign exchange reserves, but such confidence will erode if commodity prices stay low into next year and deplete reserves. Moscow is already considering the privatisation of trophy assets such as airline Aeroflot and oil group Rosneft to fill the gap left by falling oil revenues.

Kaushik Basu, World Bank chief economist, argues that the collapse in commodity prices is likely to create a split in the global economy and among emerging economies. It also comes as the slowdown facing emerging economies like China is curbing the rate at which they catch up with advanced economies. The IMF says it expects that “convergence” will happen at less than two-thirds the rate it did previously.

Cheap oil is still a boon to many developing countries, including India and Bangladesh, and advanced economies such as the US, where consumers have gone on a car-buying binge fuelled by falling fuel prices.

Yet most economists have been too slow to recognise the potential for damage to producers in the developing world. “I have to admit [the fall in prices] has gone on longer than I or we anticipated,” Mr Basu says. At the IMF and World Bank, economists now expect the slump in commodity prices to endure for some time. They argue that other developing producers are going to have to rush through painful budget adjustments.

In January, the World Bank slashed its 2016 forecast for crude prices to an average of $37 a barrel, down from $51 a barrel in October. That came alongside a broader rethink of the direction of commodity prices, with the bank’s economists lowering their forecasts for 37 of the 46 commodities they track.

The problem, says Mr Basu, is that too many producing countries are in denial about the shift or the potential remedies — and are afraid of the political consequences. “It will be very difficult. There’s no getting away from it,” he says.

Even in Suriname policymakers were until recently in denial. When the central bank announced a 25 per cent devaluation against the dollar in November it did so with a terse statement: “Suriname is momentarily experiencing a genuine commodity shock.”

Six weeks later that shock looks far from momentary with tough-minded negotiations with the IMF, World Bank and other institutions about to get under way. The question is which countries will turn to them next?

Case study: Russia

Sergei Glazyev has radical recipes for dragging Russia out of its crisis. The maverick economist and adviser to President Vladimir Putin wants to fix the rouble’s exchange rate and dish out Rbs5tn ($66bn) in loans to Russian companies.

Despite Moscow’s combative rhetoric, Mr Putin tends to follow the prudent advice of Elvira Nabiullina, the central bank governor, instead of radical ideas like Mr Glazyev’s. Still, the economist’s proposals highlight the pain of cheap oil.

Russia is set to undergo a second year of recession after its economy contracted by 3.7 per cent in 2015. The government is seeing its coffers drained as oil and gas revenues, which accounted for 43 per cent of the budget last year, are forecast to sink to under 35 per cent this year.

The finance ministry is seeking up to Rbs1tn in additional revenues to keep the budget deficit at 3 per cent. Mr Putin is considering the sale of stakes in state enterprises to raise funds.

One obvious source for additional funds is the oil sector itself. Already last year, the government raised Rbs200bn from the sector by keeping export duties at 42 per cent rather than cutting them to 36 per cent as planned. Oil executives fear the government could keep the tax at 42 per cent indefinitely, which VTB Capital says may cut the sector’s value by 20-30 per cent. Consumers are suffering, too. Pensions were raised by only 4 per cent this month to make up for rising prices, just one-third of the inflation rate.

The rapid fall of the rouble has prevented the central bank from lowering high interest rates. Last week, the bank held rates steady and even indicated that it could raise them to rein in inflation.

As a result, many companies cut investment and consumers tightened their purse strings. Retail sales plummeted by more than 15 per cent in December, the steepest monthly decline since the contraction began in late 2014.

Yet things could have been worse. “Given the magnitude of the oil price shock and the nearly complete lack of access to global financial markets, the Russian economy proved quite resilient in 2015,” says Sberbank CIB. Kathrin Hille and Jack Farchy, Moscow

Case study: Nigeria

Will low oil prices finally push Nigeria, Africa’s top crude producer, to enact reforms that make it less vulnerable to future shocks?

If the past is any indication, no. But President Muhammadu Buhari’s government says change will be painful but is possible — and the only choice.

With oil prices having hit a 13-year low in January, the high times that Nigeria enjoyed for the past decade or so are over. The IMF predicts growth will be 3.25 per cent this year, down from an average of 6.8 per cent in the 10 years to 2014.

The country has been here before, on the watch of Mr Buhari, a former army general who came to power by a coup more than 30 years ago during a downturn. He was overthrown after 18 months by officers who accused him of failing to kick-start the economy.

Capital controls introduced by the central bank, and heartily endorsed by Mr Buhari, are hurting the economy and choking the foreign exchange market in this imports-dependent country of more than 180m people. On the black market, the naira has been trading at nearly a 50 per cent premium to the official rate, hurting the poorest citizens most.

Some analysts are concerned by Nigeria’s talks with the World Bank and African Development Bank over $3.5bn in loans to plug part of a $15bn gap left by lost oil revenue. But the move could be a sign of a more realistic approach than Nigeria has taken in many years. The bid to borrow cheaply for badly needed basic infrastructure projects could help the administration diversify from oil and revive manufacturing and agribusiness.

In the proposed 2016 budget, Abuja will receive just 20 per cent of total revenues from oil — down from more than 70 per cent. The benchmark price of $38 a barrel is also realistic, analysts say. The target of increasing revenues from sources other than oil could be achievable, partly because Nigeria is starting from a low base but also because Mr Buhari is running a tighter ship.

“If they can increase tax revenues, plug some leakages and cut costs they can shift the dial to a more positive place,” says an international investor with interests in Africa. Maggie Fick, Lagos

Via FT