Most emerging market economies will be able to withstand substantially lower commodity prices, according to Deutsche Bank Research
Deutsche Bank has released new research titled "The True Impact of Commodity Prices on Emerging Markets", which suggests that while a sustained fall in commodity prices would be negative for many emerging market (EM) economies, most would be able to withstand a possible commodity shock without a derailment in policy.
The recent decline in commodity prices has raised questions about the impact of a sustained fall on EM assets. Deutsche Bank does not expect such a fall, but has undertaken a study to examine the possible impact. While the consequences of such a fall would be negative for many EM economies, most countries would be able to withstand the commodity shock, without a derailment in policy, given the marked improvement in fundamentals in recent years.
Even if there were a recession in the United States during 2007, while the likely drop in demand would be bearish for oil markets, it is probable that OPEC would defend against any move below USD50 with production cuts.
Marcel Cassard, Head of Global Fixed Income Strategies & Economics, commented, ”Through undertaking an exhaustive analysis of the implications of different commodity price forecasts for EM countries, we have shown why a modest fall in commodities (our base case scenario) will not seriously damage economic fundamentals, although a more extreme scenario could lead to a more meaningful shock for Venezuela, Ecuador and Colombia.
“In our research, we examine the fair value of the real exchange rate and spreads under a negative commodity shock using our F2X, F2S and RESRM models. We find that even under a hard-landing scenario, which would hit oil exporters, the fundamental impact would be more likely to result in a healthy price correction than a crisis.”
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