Falling commodity prices to hurt emerging markets

This week we take a closer look at the latest World Bank Group Global Economic Prospects Report — January 2015.

The Ritesh Anand Column

According to the World Bank, “the global economy is still struggling to gain momentum as many high-income countries continue to grapple with the legacies of the global financial crisis and emerging economies are less dynamic than in the past”.

After rising marginally in 2014, to 2,6%, world GDP will grow by an estimated 3% in 2015 and 3,3% in 2016, supported by gradual recovery in high-income countries, low oil prices, and receding domestic headwinds in developing countries. Developing economies are expected to see an increase in growth from 4,4% in 2014 to 4,8% and 5,3% in 2015 and 2016, respectively.

Sub-Saharan Africa (SSA) is expected to grow by 4,6% in 2015 and rise gradually to 5,1% in 2016, supported by sustained infrastructure investment, increased agricultural production and expanding service sectors. Zimbabwe is projected to grow by 3,2% in 2015 and 3,7% in 2016, but a lot will depend on agricultural production and commodity prices.

Lower oil prices will lead to significant shifts in real income from oil-exporting countries to oil-importing ones. This will benefit a number of African countries including Zimbabwe.

However, falling commodity prices are likely to offset some of the benefits.

Risks to the global outlook remain tilted downwards especially if the Eurozone or Japan experience prolonged periods of stagnation or deflation.

Financial conditions could become volatile as high-income economies tighten monetary policies on diverging timelines.

Africa has certainly benefited from increasing fund flows due to expansionary monetary policies in the West. The end of quantitative easing in many developed markets is likely to result in reduced fund flows to Africa. Other risks include a spike in geopolitical tensions, bouts of volatility in commodity markets or financial stress in major emerging market economies.

Developing countries face significant policy challenges in an environment of weak global growth and considerable uncertainty. Fiscal buffers need to be rebuilt to ensure the effectiveness of fiscal policy in the future. Central banks need to balance policies to support growth against measures to stabilise inflation and currencies or to bolster financial stability.

It is interesting to note that growth in SSA is fairly resilient to a variety of external shocks. In contrast, it is highly vulnerable to domestic shocks, such as drought or civil conflict. I will take a closer look at this next week.

Commodity prices and capital inflows are expected to decline in 2015, as growth in emerging markets remains subdued. Any slowdown in China and India is likely to have a significant impact on commodity prices as discussed last week.

Foreign direct investment (FDI) flows are projected to remain flat in 2015 and sovereign bond issuance will slow as global financial conditions gradually tighten. SSA would nevertheless remain one of the fastest growing regions.

Private consumption growth in the region is expected to remain robust. Reduced imported inflation, aided by low commodity prices as well as stable exchange rates and adequate local harvests should help contain inflationary pressures in most countries and boost real disposable incomes.

The risks to SSA’s outlook are to the downside, stemming from both exogeneous and endogenous factors. Endogenous risks include the Ebola epidemic, expansionary fiscal policy and currency weaknesses and the precarious security situation in a number of countries. A sudden increase in volatility in international financial markets and lower growth in export markets are among the major external risks to the region’s outlook.

Volatility in global financial markets raising risk premiums from their current low levels is likely to hurt SSA. A sudden deterioration in liquidity conditions would have a particularly hard impact on South Africa, which depends heavily on portfolio flows to finance its current account balance.

The key risk affecting Zimbabwe is the fall in commodity prices and the impact this is likely to have on the mining sector.

According to the Chamber of Mines (CoM), the mining sector is expected to decline for the first time in five years due to plummeting commodity prices, high costs and lack of capital.

Said CoM: “… the sector continues to operate below capacity amidst a host of challenges, not restricted to, but including depressed metal prices, lower capital and FDI flows, high cost structures, sub-optimal royalties and power shortages”.

Commodity prices have risen strongly over the last decade driven by China’s insatiable demand. However, commodity prices fell dramatically last year due, primarily, to slowdown in economic activity in emerging markets especially China.

In essence, the World Bank report highlights the risks to global growth and especially in the developing world. The end of quantitative easing in most developed markets will have a negative impact on fund flows to emerging markets including Africa. We are likely to see significant divergences in growth across countries.

While the collapse in oil prices is likely to benefit oil-importing countries, any benefit is likely to be offset by falling commodity prices.

The risks are tilted to the downside and any risk to growth in emerging markets, especially China, could adversely affect SSA.
Zimbabwe already faces significant obstacles to growth and needs to consider carefully the deteriorating global macro-economic conditions in formulating policy. This year is likely to be a challenging year for most.