Jun 12 2018

Argentina, Turkey vulnerable as oil prices rise – FT

A spike in oil prices is raising fears of social unrest and the economies of Argentina and Turkey are particularly vulnerable with another chunky increase in inflation and a slide in growth likely, the Financial Times reported.

A nearly 70 percent jump in oil prices in the past year have already led to mass protests in Brazil, Jordan and Morocco, the FT said.

“Vulnerable emerging markets are the biggest concern,” said Gabriel Sterne, head of political macroeconomic research at consultancy firm Oxford Economics. “For some the impact is relatively large and could pile pressure on already strained domestic policies.

 “The biggest concern is those economies where the impact of higher oil provides a threat to political stability,” Sterne said. “Risk premia on their financial assets may therefore remain elevated for a while.”

Analysis by UBS suggests average emerging-market inflation will peak at 6.1 percent in March 2019, should oil prices hit $100 per barrel, from 4.4 percent at present. The price of Brent crude rose 0.8 perent to $77 per barrel on Tuesday. Average central bank interest rates would also rise to 6.86 percent from 6.34 percent, it said.

Turkey would be one of the countries worst hit, with economic growth falling to 2.4 percent in 2019 from 7.4 percent today as higher oil prices and inflation give the central bank less room to cut interest rates, UBS said.

Argentina has raised interest rates substantially and signed a loan accord with the International Monetary Fund worth $50 billion to provide its economy with a safety net amid a recent sell-off in emerging market assets, prompted by the prospect of further interest rate increases by the U.S. Federal Reserve.

The government in Turkey has already begun subsidizing the price of petrol at the pump via tax reductions as it prepares to fight presidential and parliamentary elections on June 24.