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Wednesday, 13 June 2018

Rising oil prices could push political tension in EMs to their boiling point

Rising oil prices could drive political tensions in emerging markets to a boiling point, Steve Johnson writes for the FT. Higher fuel prices have already led to mass protests in Brazil, Jordan, and Morocco, and analysts see other emerging markets such as Argentina, Turkey, and Mexico as particularly susceptible to the same scenario unfolding. These countries are already facing several challenges, including a potential reversal of capital flows, a “‘sharp’ deterioration in their terms of trade,” and a strengthening USD that has made EMs less attractive. “Across EM oil importers as a whole, inflation would be 0.7 percentage points higher on average between 2018 and 2020, than under Oxford Economics’ baseline forecast of USD 85-a-barrel oil. Economic output would be 0.7 percentage points lower.”

The prognosis: Oil-importing EMs will likely be forced to tighten their monetary policy to counteract weak economic growth. Central bank interest rates in all EMs except China are expected to rise to an average of 6.86% by March 2019, up from 6.34% currently. Developed countries with advanced economies, meanwhile, would probably only be “modestly” impacted by the rising prices, which means these countries will be able to maintain a loose monetary policy.

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