Emerging markets have had a tumultuous time over the past couple of years, with pressure from a strong dollar and the fallout from the China-U.S. trade war adding to reverberations from individual crises in countries like Turkey and Argentina.
More than half of the largest emerging market economies are crude oil importers with China and India near the top of the list. But much of the focus will be on sizeable emerging markets, which depend heavily on foreign money flows and have currencies that have struggled in recent months and years.
"Whenever commodities prices spike, and especially oil prices, the analysis of effects on sovereign balance sheets becomes pertinent again," said Bryan Carter, head of emerging market fixed income at BNP Paribas Asset Management, adding much of the impact depended on how long prices remained elevated.
Trouble could be brewing for those emerging economies in particular that have been hit by a combination of currency weakness, heavy reliance on dollar-denominated energy imports and external funding flows.
"India and Turkey are generally the markets most associated with being harmed by dear oil," Carter added.
Turkey, South Africa and India have all seen imports as a share of GDP rise over the past two years, with fuel making up an ever larger chunk.
Graphic: The pressure is on for EM oil importers, https://fingfx.thomsonreuters.com/gfx/mkt/13/624/624/The%20pressure%20is%20on%20for%20EM%20oil%20importers.png
And currency weakness has amplified the woes. While Brent prices -- bar some ups and downs -- are trading broadly close to levels seen two years ago, many emerging market countries have seen prices jump in their own currencies.
"Oil has been rising since early October. It is up 20% and we are entering a period when typically the market would be oversupplied (because growth has been soft)," said Viktor Szabo at Aberdeen Standard Investments.
"So if it stays here you have to rethink the slightly stronger FX effect on inflation. Then you have to rethink your rate assumptions and then on from there your growth assumptions."
Graphic: Currency woes add to the pressure, https://fingfx.thomsonreuters.com/gfx/mkt/13/626/626/Currency%20woes%20.png
When oil prices gain, analysts also closely watch how another oil shock might affect a country's import cover and the adequacy of central banks' foreign currency reserves.
Importers such as India, China and Turkey are exposed to any combination of a jump in import prices and higher domestic demand, said Simon Quijano-Evans, chief economist at Gemcorp Capital LLP.
"That is where higher FX reserves and real interest rates step in to provide relative protection against any negative spillover from higher commodity prices into FX depreciation and inflation," he said.
Graphic: FX reserves in focus, https://fingfx.thomsonreuters.com/gfx/mkt/13/627/627/FX%20reserve%20import%20cover.png
By Karin Strohecker
