Although EMs did weaken on Brexit, they did not fall significantly, and certainly not to the extent European FX markets were hit.
The Polish zloty fell from 3.8345 to 3.9990 against the US dollar on June 24, and the Brazilian real remained relatively resilient, only falling from 3.3376 to 3.3748 versus the dollar according to Bloomberg.
EMs on the whole are much more susceptible to fluctuations in commodity prices, which is particularly true for the large exporters such as Brazil, Russia, Mexico and Venezuela.
“The large EM drivers such as Russia are much more susceptible to fluctuating commodity prices,” said Raymond Zucaro, CIO at RVX Asset Management.
He added that Venezuela, Mexico and Russia have recovered significantly on oil as it rose from its January lows.
Thomas Pugh, Commodities Economist at Capital Economics noted that many Latin American EMs were heavily dependent on commodities. Brazilian exports alone accounted for 14% of GDP in 2012.
“Brazil is a big exporter of oil, soy beans and other crops. Chile exports a large amount of base metals and Venezuela is completely dependent on oil,” he stated.
Aside from LatAm, which has varied commodity exports in the form of industrial metals and agriculture, and South Africa, which is also heavily reliant on various commodity exports, the majority of commodity-dependent EMs rely on oil.
Angola and Nigeria are heavily dependent on oil, as is the Middle East. The performance of oil has over the past year had a detrimental impact on the fixed income performance of exporting nations.
Brazilian government 10-year bonds were yielding over 16% when oil prices hit lows of US$28 per barrel in January this year. They are currently yielding just over 12% now that prices have recovered slightly, according to figures from Trading Economics.
Although oil prices have doubled over the past few months and Brent Crude is now trading at US$47.84 per barrel according to Bloomberg, prices are still less than half what they were two years ago.
“The percentage moves have been very large, but in absolute terms, which is what matters to consumers, they are still well below what they were two years ago,” Pugh said.
Despite rising from its January lows, oil has remained relatively stable since its recovery, meaning yields have remained relatively stable.
“Over the last two months there has not been a significant adjustment on the back of commodity prices. They have certainly moved from trough to peak, but not so much in the short term,” Zucaro stated.
He added however that if oil moves 10 points in a day, energy exporters will undoubtedly weaken.
The rise in the price of commodities may have slightly benefitted EM exporters, but it has not affected importers. Pugh noted that commodity prices have not increased significantly enough at present to have a detrimental effect on the finances of EM commodity importers such as Kenya.
