What Next for the Commodity Economies?

Brazil, Russia and Australia are heavily dependent on mining and natural resources companies to thrive, what does 2014 hold for these commodity economies?

Coutts 1 November, 2013 | 12:32PM

This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Mark McFarland, Global Chief Economist at Coutts gives his outlook for the commodity economies.

Brazil

Brazil was one of the major beneficiaries of global capital flows over 2010-12. The Brazilian real’s rise prompted the central bank to impose capital controls to stem its appreciation. As investors began anticipating tighter US monetary policy in 2013, Brazil’s twin fiscal and trade deficits (3% of GDP) left it exposed to outflows. It is unfortunate that this has coincided with an improvement in the country’s household and corporate debt profile. If commodity prices remain subdued, the central bank may not have to raise rates much above 9% and GDP growth may increase from under 1% in 2012 to 3% in 2015.

Russia

We expect Russia’s GDP growth rate to recover from around 2% this year to just over 3% in 2015. Russia needs the oil price to stay above $110 per barrel to help it balance its budget. If oil prices were to decline substantially, Russia’s ability to embark on much-needed public infrastructure projects would be impeded and the ruble would come under selling pressure. This is not our expectation as geopolitical risk remains high in the Middle East and North Africa (MENA), and the country’s current account surplus (3% of GDP) makes the ruble fairly resilient. This currency resilience potentially makes Russia’s shorter-dated local currency bonds attractive as the central bank is not expected to start raising interest rates until well into 2015.

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