The ongoing increase in oil prices is an important downside risk for our economic outlook for Emerging Markets (EMs), which was recently updated (see "Economic Outlook Emerging Markets Q4 2023: The Lagged Effects Of Monetary Policy Will Test Resilience," Sept. 25, 2023). Our baseline scenario assumes relatively stable oil prices in the coming quarters, with Brent averaging $85/barrel in the remainder of 2023 and 2024 (see "S&P Global Ratings' Oil And Gas Price Assumptions Are Unchanged," Sept. 20, 2023). However, the price of Brent crude is up 28% since the end of June, topping $95/barrel, in part because of production cuts announced by Saudi Arabia. Slowing inflation has allowed several EM central banks to start lowering interest rates, and others are expected to follow in the coming quarters. Higher energy prices could slow, or delay, future interest rate reductions by EM central banks (see chart 1).

Chart 1

Energy generally has a significantly higher weight in the consumer price index (CPI) baskets of EMs than in those of developed economies.   In the median EM, energy prices, which include both fuels for transportation and electricity at home, account for 10% of the CPI basket (see chart 2). In the U.S., for example, they account for 6.9%. In some EMs, the energy weight in the CPI is two to three times higher than that of the U.S. In Poland, for example, energy prices account for 18.3% of the basket, and 13.3% in Hungary.

Chart 2

Lower average energy prices than last year have fueled the disinflation prcocess, but the recent increase in the price of oil, if sustained, could slow, or even reverse this trend.   Energy price increases in the median EM have slowed from 15.5% year over year in 2022, to 4.2% so far this year, as of August (see chart 3). Two main caveats are worth noting. So far, natural gas prices, which before the Russia-Ukraine conflict generally moved together with oil prices, have remained relatively stable in recent months. This means that the price of electricity, which in many cases is fueled by natural gas, may not increase much, unless natural gas prices also start moving significantly higher. In addition, several EMs have energy prices (electricity and/or fuel) that are regulated by the government, which means that increases in international energy prices don't always translate to similar increases in domestic energy prices. In those cases, the government typically absorbs those costs through subsidies. This is evident in countries where energy prices are higher this year than last, like Hungary, Colombia, and Indonesia (see chart 3 again).

Chart 3

The recent increase in oil prices comes at a time of renewed broad U.S. dollar strength, amplifying the potential impact on inflation in EMs.   In Chilean pesos, oil prices are nearly 45% higher since the end of June, 40% in Hungarian forints, and about 35% in Polish zloty and Turkish lira terms (see chart 4).

Chart 4

If the recent increase in oil prices persists, several EM central banks could opt to slow or delay expected interest rate reductions, especially in the case of large net energy importers.   In these countries, external account balances could deteriorate substantially in the event of higher energy prices, and this typically exerts depreciatory pressure on the domestic currency (while increasing external financing needs). In this scenario, EM central banks would likely hesitate to lower interest rates substantially, to prevent disorderly capital outflows, which would weaken currencies further.

Chart 5

Out of the 18 major EMs we focus on, only five are net energy exporters, Saudi Arabia, Colombia, Indonesia, Malaysia, and Brazil. The remaining are net importers of energy. Thailand, Hungary, Chile, Turkiye, the Philippines, India and Poland stand out for having particularly large net imports as a share of GDP (see chart 5). The good news is that in most of those countries, lower average energy prices this year, compared with 2022, among other factors, helped improve their current account balances in 2023 (see chart 6), so far. However, that could change rapidly if energy trade balances start to deteriorate noticeably.

Chart 6

Within the group of large EM net energy importers, higher energy prices could slow the pace of interest rate reductions in Chile, Poland, and Hungary, delay the start of rate cuts in Thailand, the Philippines, and India, and encourage more rate hikes than what is already expected in Turkiye.

• The central banks of Chile and Poland have already started lowering their benchmark interest rates, but the market (according to interest rate swaps) is pricing in additional 375 basis points (bps) and 100 bps of rate cuts, respectively, in the next 12 months (see chart 7).
• In Hungary, the central bank has been normalizing its interest rate corridor for several months, finalizing that process in its latest meeting, effectively setting the stage to reduce its base rate. In those cases, the magnitude of interest rate cuts could be lower than what is currently expected if energy prices continue to head higher.
• Thailand's central bank actually increased its interest rate in its latest meeting (Sept. 27), for the eighth consecutive time. Although it seems to be at or near peak rates, the debate is likely to shift to when it can start lowering interest rates, which could be dismissed if energy prices start to put renewed upward pressure on inflation. In India and the Philippines, the policy rate has been kept unchanged for the last three and four consecutive meetings, respectively.
• The Turkish central bank has been shifting to more orthodox monetary policy, which meant battling double-digit inflation (near 60% year over year in August) with large increases in interest rates. Its one-week repo reference rate has gone up from 8.50% in June to 30% currently and is expected to continue heading higher in the coming months. Higher energy prices could increase inflation expectations and amplify pressure on interest rates.

Chart 7

Higher interest rates will hamper debt refinancing in some EMs.  If the uptick in energy prices keep interest rates higher than what is currently expected, issuers will face greater obstacles in refinance their debt. During the pandemic, most issuers took advantage of the highly accommodative financing conditions to issue debt, strengthen their liquidity profile, and extend their maturity schedule. Hence, maturities have been very manageable in recent years. However, global maturities are building up with considerable peaks coming in 2025 (see chart 8). In the case of EMs, maturities are higher in 2024 than in 2023, and increase further in 2026 (see chart 9). Out of the 18 key emerging economies we follow, the largest maturities will come due for China in 2024 and 2025, with $64 billion and $53 billion coming due in those years, respectively. Excluding China--Mexico, India, and Brazil--have the largest maturities coming due over the next four years (see chart 9).

Chart 8

Chart 9

Issuer competition for liquidity will be fierce in the next two years. Amid currently high interest rates across the globe, lower-rated EM issuers will likely be disadvantaged as investors will demand additional returns to compensate for the higher country risk premia than those in advanced economies. Speculative-grade maturities are manageable in 2024, at 17.6% of the total debt coming due, but will be increasing significantly in 2025 and 2026, reaching 24.5% and 31.5%, respectively (see chart 10).

It is highly unlikely that issuers will wait until 2025 to refinance, and they will probably tap the market in 2024 with interest rates still high. These conditions could be unsustainable for many issuers, leading to defaults and bankruptcies. Sectors with the largest maturities coming due are financial institutions, oil and gas, homebuilders, real estate and telecommunications (see chart 11). Sectors highly dependent on leverage like real estate, oil and gas, utilities, and telecommunications will suffer the most during times of high interest rates.

Chart 10

Chart 11