Emerging market economies have shown an unexpected resilience in their ability to weather the shock of rising oil prices, the IMF says.
Oil prices have shot up more than sixfold in four years, and the countries of emerging Asia, Central America and much of sub-Saharan Africa are almost wholly dependent on oil imports. Yet rather than seeing their national accounts savaged, strong growth has helped many of them withstand the effects. “There has been some negative impact from rising oil prices, but the fundamentals of Asia have been so strong that growth has been little affected,” Tim Callen, division chief of the Fund’s research department, told Emerging Markets.
In Asia, overall growth has hit 8.5% per year in 2004-05 and is projected to be 8.3% and 8.2% in 2006 and 2007, respectively. The countries run strong current account surpluses, of 4.5% of GDP for the region as a whole.
Strong growth, however, is itself part of the problem: Asia, and in particular China – which accounts for 30% of the increase in global oil consumption in the last four years – has played a large part in driving up prices. But high prices will eventually help moderate growth, which in turn will bring prices down, Callen pointed out.
Many smaller economies, among them oil importers in Central America, have managed the oil shock well. “This shock has been embedded in a very favorable external environment [for Central America] so the impact on countries has been very small and almost within the margin of error,” said Markus Rodlauer, senior advisor of the western hemisphere department of the IMF.
Rapid global economic growth has boosted Central American exports, low international interest rates favour borrower nations, and strong commodity prices have functioned as buffers for the fragile economies. Rapidly-rising volumes of remittances from workers abroad also shield the region’s economies.
High oil prices aren’t going to go away anytime soon, so governments must look for ways to cope. “The Fund recommends passing through [the higher cost of fuel] to consumers and then creating ways to mitigate the impact on the most vulnerable ones”, says Rodlauer. Urban workers need subsidies on transportation costs, and fuels used mostly by the poor, such as kerosene, could be cross-subsidized.
The IMF cautions against subsidizing a general fuel price because that mainly helps the middle and upper class. Countries such as Nicaragua that subsidize electricity, to the point where consumers pay less than the cost of generation, are suffering energy outages.
Oil prices are also driving an intensified search for renewable fuels in Central America and the Dominican Republic.