Argentina, a commodity driven economy that is facing all the negatives of weak commodity prices and poor economic policies, devalued its currency on the 23rd of January 2014. The Peso lost 15% against the USD and Argentina’s central bank had to step in to stem the fall by selling from its depleted currency reserves. Argentina’s currency reserves has more than halved over the last one year.
The Indian Rupee (INR) fell 1.7% against the USD last week on the back of volatility in emerging currencies led by the Peso. The Turkish Lira that fell to record lows against the USD on the back of political issues and on worries of financing a widening current account deficit, also added to currency volatility globally. However the INR will not see a sell off like it saw in the July-August period when the currency touched record lows against the USD.
Commodity driven economies are under pressure, as they have not diversified to other streams to lower dependence on commodity exports for revenues. Economies from Brazil to Russia are really under pressure as their economic growth has fallen sharply on the back of lower commodity prices and on the back of China the worlds largest consumer of commodities seeing its economic growth come off from double digit levels to levels of 7.7% for 2013.
Brazil GDP growth for third quarter of 2013 was 2.2% while Russia GDP growth was just 1.2%. Australia GDP grew by 2.3% in the third quarter. All these countries have seen their currencies weaken on the back of falling GDP growth with one year fall of around 15% against the USD.
Commodity weakness is set to continue as China adopts structural reforms to fight asset price bubbles, over investments and bad loans. China’s lower growth will reflect on lower commodity imports further weakening the prospects of commodity driven economies.
China’s place as the world’s largest commodity consumer is unlikely to be replaced by any other world economy including the US. US and Europe have budget constraints to pump money into huge infrastructure spends as these governments are fighting high debt burdens. US debt is around 75% of GDP while many European countries have debt of well over 100% of GDP.
Emerging economies such as India are nowhere near the size of China nor do they have fiscal capability to spend on commodities.
The prospects for economies depending on oil and gas exports are not very bright given that US the world’s largest oil consumer is looking to become the world’s largest producer and would start exporting oil in the near future. Oil prices are well below highs of USD 140/bbl seen in 2008.
What does this economic weakness of commodity driven countries mean for India. On the positive, India is benefitted from global commodity weakness, as it is a net commodity importer. The country has to spend less on commodity imports given weakness in commodity prices though depreciation in the Indian Rupee that is down over 40% from highs over the last few years is negating that to a large extent.
Weakness in global commodity prices is also positive for inflation as expectations of rising prices come off. India has been hit more by food inflation that is running at high double digit levels rather than by global commodity prices.
On the negative side, India faces weakening export markets as countries from the Middle East to Latin America consume less in the face of economic weakness. India would not be spending much on oil extraction and extraction of other commodities and this could prove detrimental later down the line when commodity prices rise.
India to a large extent is a beneficiary of global commodity weakness as it has developed a strong industry as well as a strong service sector that contributes to 27% and 59% of GDP respectively. India, more by need rather than by design, has been forced to widen its manufacturing and service industries leading to low dependence on commodity including agriculture for economic growth.