Macroeconomic Instability For Emerging Markets Thanks To Commodity Bust
The bust in commodity prices is sending ripples through the world of emerging markets.
Countries depending on resource extraction and exports of commodities have run into a brick wall this year the prices collapsed for all sorts of materials – oil, gas, coal, gold, copper, and more. The bust presents macroeconomic risks to these countries, and the risks are greater for economies that are less diversified and more dependent on commodities.
Already, we have seen the sharp loss in value for currencies in emerging markets. China devalued its currency over the summer, sending a wave of panicthrough emerging markets. The currencies of commodity exporters (Russia, Brazil, Mexico, Nigeria, and Iraq, just to name a few) were already under pressure before China’s devaluation, but China’s decision threw the weaknesses of emerging markets into sharp relief.
Related: Has Oil Finally Bottomed?
Commodities tend to go through booms and busts. The seeds of the latest “supercycle” for commodities were planted around a decade ago. Capitalizing off of the scorching growth in China, capital-intensive resource extraction projects were planned around the world. Between 2005 and 2014, a staggering $745 billion worth of investment flowed into new oil, gas, and mining projects. The sum peaked in 2008 and 2009, when petroleum and mining projects accounted for 10 to 12 percent of total foreign direct investment around the world.
Of course, an oil project, or a new coal mine takes several years to build and to bring online. That explains the massive volume of new capacity for all types of commodities that came online in the last two years or so. In other words, the run up in commodity prices between 2005 and 2010 sparked a wave of investment, but all that new capacity came online in 2013-2014, popping the bubble in commodity prices.
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