Rising fuel prices, driven by a near-70 per cent jump in global oil prices in the past year, have led to mass protests in Brazil, Jordan and Morocco.
Fears are now building that social unrest could spread to other emerging economies such as Argentina and Turkey if oil prices continued their rise from $76 to $100 a barrel, a level they reached for much of the period between 2008 and 2014.
“I think the risk of social unrest is probably quite widespread [if we get to $100],” said Gabriel Sterne, head of global macroeconomic research at Oxford Economics, a consultancy.
“It’s going to hit countries that can’t afford to be hit. That’s where the action is going to take place in the future.”
Quinn Markwith, Latin American economist at Capital Economics, added: “A spike in fuel prices could escalate political tension in the [Latam] region. Increases in fuel prices tend to be more visible to consumers than is the case with other goods, which in turn increases the risk of a backlash.”
Pointing to Brazil’s recent strike by truckers, which ended with the government caving in to demands by drivers to reinstate diesel subsidies in order to end protests that led to outbreaks of violence and paralysed much of the country, Mr Markwith said “similar sensitivities are present elsewhere in the region, notably Mexico and Argentina”.
The Jordanian demonstrations, which also ended with a government climbdown, topped by the resignation of prime minister Hani Mulki, were also, in part, a protest against shortlived increases in fuel and electricity prices implemented in return for an IMF bailout.
Consumer boycotts of suppliers of petrol, among other goods, have also occurred in Morocco, in protest against high prices.
Oxford’s econometric model suggests a supply-driven rise in oil prices to $100 a barrel would have a relatively modest impact on developed economies, as rising oil prices were unlikely to set off a wage-price spiral, meaning monetary policy can be kept loose.
Moreover, energy typically has a relatively small weighting in the inflation basket in advanced economies, and the intensity of oil demand per unit of GDP has fallen sharply in recent decades.
The story might be different for emerging market oil importers, though, with Mr Sterne warning the impact would be “relatively large” for some.
A combination of a “sharp” deterioration in their terms of trade, a potentially strengthening dollar, the likelihood of a reversal of capital flows and the recent cutbacks in fuel subsidies in a number of countries (typically enacted when oil prices were $30-$50), leaving consumers at the mercy of rising prices, could prove painful.
Across EM oil importers as a whole, inflation would be 0.7 percentage points higher on average between 2018 and 2020, than under Oxford Economics’ baseline forecast of $85-a-barrel oil. Economic output would be 0.7 percentage points lower.
The impact would be greater still in some countries. Bulgaria, the Philippines and Greece would all have their GDP growth rate reduced by more than 1.3 percentage points, alongside inflation about 1.5 points higher than under the baseline scenario, the model predicts, as the first chart shows.
Argentina and Turkey, two countries already facing the twin threats of rising inflation because of sliding currencies, and weaker growth, thanks to emergency interest rate rises implemented in an attempt to stabilise their exchange rates, would also be likely to see another chunky rise in inflation and slide in growth.
Emerging market heavyweights India and China, although far better positioned to withstand the impact, are also projected to have larger than average declines in growth and rises in inflation in a world of $100 oil.
“Vulnerable emerging markets are the biggest concern. For some the impact is relatively large and could pile pressure on already-strained domestic policies,” said Mr Sterne.
“The IMF has been banging on for years about oil subsidies, telling countries they had to get rid of them. But they were there for a reason. A lot of countries did take the opportunity to get rid of them, but when the oil price rises consumers don’t like it.
“The biggest concern is those economies where the impact of higher oil provides a threat to political stability. Risk premia on their financial assets may therefore remain elevated for a while.”
Separate analysis by UBS suggests emerging market-wide inflation would jump from 4.4 per cent at present to a peak of 6.1 per cent in March 2019 if oil was to hit $100 a barrel, as depicted in the second chart, far outstripping an equivalent rise in the developed world from 2.6 per cent to a peak of 2.9 per cent.
Central bank interest rates across the EM world (excluding China) would also rise from an average of 6.34 per cent to a peak of 6.86 per cent in March 2019, UBS’s model suggests, rather than essentially flatlining under the Swiss bank’s baseline forecast of $80-a-barrel oil, as illustrated in the third chart.
Policy rates would also rise in developed markets, but only a fraction more than they would do under UBS’ baseline scenario anyway, given the ongoing tightening under way in the US and the likelihood that Canada and, eventually, the eurozone, will follow suit.
Turkey would be one of the countries worst hit in the bank’s $100 scenario with economic growth falling from 7.4 per cent this year to 2.4 per cent in 2019 as higher oil prices and inflation gave the central bank less scope to cut rates.
Mexico would be forced to raise rates from 7.5 to 8.5 per cent under the $100 scenario, rather than cutting them to 6.5 per cent around the middle of 2019 under the $80 model.
Brazil would have to tighten 325 basis points to 9.5 per cent, Indonesia by 100bp to 5.25 per cent and South Africa by 50bp to 7 per cent by the middle of next year, UBS predicted.
India would also need to increase by 75bp to 6.75 per cent with oil at $100. Despite this, Krishna Kumar, investment director at Singapore-based Eastspring Investments argued that the steps India has taken to cut fuel subsidies are “quite irreversible”.
“India takes a long time to put policies in place. When they do they don’t reverse it, because that would take just as long,” said Mr Kumar, who suggested the government would compensate low-income consumers thorough cash payments instead.
As for frontier market countries, where social unrest might be more likely, Hasnain Malik, head of equity research at Exotix Capital, an emerging market-focused investment bank, said: “After several years of low inflation, the turn in fuel prices presents a challenge to those importers who have not sufficiently reined in their fiscal budgets or reduced government debt when times were good and are still expected by their populations to provide subsidies during fuel price spikes.”
Likely candidates include Jordan, Lebanon, Kenya, Tanzania, Tunisia, Pakistan, Sri Lanka and Zimbabwe, Mr Malik said, although higher oil prices would only trigger popular protests where there is sufficient “underlying frustration on issues of political inclusion and social justice and an absence of any near-term outlet, such as elections.”
His colleague at Exotix, Paul Domjan, the global head of analytics, data and research, said many frontier governments had loosened fiscal policy to bolster growth and keep their populations onside, a policy facilitated by record low global interest rates.
However, with global rates rising and the dollar strengthening — weakening the attraction of emerging and frontier markets — “it’s much harder than it would have been a year or two ago to make up for weak growth with fiscal policy” in order to offset the pain of rising commodity prices, said Mr Domjan, citing the Jordanian protests as an early sign of the potential repercussions.
Moreover, the poorest frontier countries are often where the impact of rising global oil prices will be most acutely felt.
In richer countries, where tax typically accounts for a large slice of forecourt petrol and diesel prices, a given percentage rise in oil prices will lead to a much smaller rise in consumer prices. But frontier countries “don’t have very high taxation in general and their fuel taxes are much lower so there is a bigger impact on consumers,” Mr Domjan said, while fuel is typically a larger constituent of the inflation basket and a major driver of food inflation.
Having friends on the other side of the oil ledger can afford some benefits at a time of rising prices, however. Saudi Arabia, Kuwait and the UAE — among the major winners from rallying oil prices — on Monday pledged $2.5bn in aid to Jordan.