List of emerging market currencies displayed on a screen. (Photographer: Sanjit Das/Bloomberg)

Fresh Blow for Emerging Markets as Rising Oil Hits Importers

(Bloomberg) -- For years, higher oil prices have stoked gains in emerging-market currencies. But now, Brent crude’s rally to a four-year high is beginning to hurt them.

Crude-oil futures rose above $85 a barrel this week for the first time since 2014 as concern about shrinking Iranian exports outweighed higher U.S. stockpiles. That, together with anxiety over rising U.S. Treasury yields, has caused a gauge of Asian currencies to head for its biggest weekly loss since July, with South Korea’s won performing the worst on Thursday.

Fresh Blow for Emerging Markets as Rising Oil Hits Importers

While the emerging-market complex includes some of the world’s biggest exporters such as Russia, Saudi Arabia and Mexico, it also includes importers like India and Turkey. The balance of the impact from an oil rally has been typically positive. That relationship is reducing now with rising geopolitical conflicts driving crude prices up and supporting a sell-off in emerging-market assets.

The 30-day correlation between Brent crude and the MSCI’s index of currencies in developing nations turned negative in late September and fell to its lowest this year on Monday.

“The past week’s sharp increase in oil prices is an additional important factor to watch,” Credit Suisse Group AG analysts including Kasper Bartholdy and Daniel Chodos said in a note to clients. “Oil-price increases directly harm real incomes and raise the current-account deficits of oil-importing high-beta emerging-market countries, most notably Turkey and South Africa.”

Even though exporters including Russia, Colombia and the Arab Gulf nations may benefit, the net impact of oil-price gains on emerging economies may be negative, the analysts said.

Fresh Blow for Emerging Markets as Rising Oil Hits Importers

Argentina and Turkey are among the worst hit, given the drop this year in their currencies, each of which has weakened more than 35 percent against the dollar. Oil prices are already up 165 percent in 2018 when denominated in pesos, and have more than doubled in liras. India, the world’s biggest oil importer after China and the U.S., has seen the rupee-price of oil jump 50 percent.

Thailand is one of the few importers not suffering a double blow. The baht has been steady against the greenback this year, meaning the cost of its crude imports has risen by no more than the price of the commodity itself.

The MSCI currency gauge has dropped 5.2 percent in 2018, its worst yearly performance since 2015. There might be more pain if crude prices stay high, which Goldman Sachs Group Inc. says could be the case for the rest of the year given the plunge in Iran’s exports.

Today’s oil spike is “distinctively negative” for some emerging markets given it’s happening when their growth is decelerating, said Citigroup Inc. analysts including Luis Costa and Dumitru Vicol.

“The drivers have been more on the supply side rather than on the demand side,” they said.

©2018 Bloomberg L.P.