Trade Insights ISSUE No. 6
MARCH 2015
Commodity Price Crash: Risks to Exports and Economic Growth in Asia-Pacific LDCs and LLDCs AMAN SAGGU* AND WITADA ANUKOONWATTAKA** Highlights This note identifies Asia-Pacific LDCs and LLDCs1 with export-portfolios and economies which are at greatest risk from the recent collapse in commodity prices (June 2014 to January 2015). The primary objective is to identify countries whose exports have been highly vulnerable to the recent commodity price decline, in an effort to encourage policies which promote export diversification, as well as to offer strategies for effectively managing revenues in commodity-export dependent economies. Key findings: The Asia-Pacific region is a major source of global commodity-exports. Regional economies account for 38% of global mineral and metal exports, as well as 29% of global fuel exports. There are 18 net commodity-exporters in the region, with commodity-trade surpluses ranging from 0.11% of GDP in Myanmar to 59% of GDP in Brunei Darussalam. Export revenues and economic growth are likely to be negatively impacted in these countries. Asia-Pacific LDCs and LLDCs (total of 21 nations) account for just 7% of commodityexports in the region however many have export-portfolios and economies highly reliant on one or two commodity-exports: mainly aluminum; crude oil; copper; cotton; iron ore/steel; and natural gas. The average share of total exports in just one commodity is 32%. Economic growth is at significant risk from sharp changes in commodity prices across many Asia-Pacific LDCs and LLDCs. The most vulnerable economies include: Azerbaijan, Kazakhstan, Mongolia and Turkmenistan, where commodity-export revenues account for 24-37% of GDP. Improved revenue management is the most plausible short-term strategy for insulating and stabilizing the incomes of commodity-export dependent economies from volatile commodity prices. In the long-term, structural reforms to build productive capacity such as greater investment in education and infrastructure, is required to encourage export diversification. 1
Asia-Pacific land-locked developing countries (LLDCs) include: Afghanistan, Armenia, Azerbaijan, Bhutan, Kazakhstan, Kyrgyzstan, Lao PDR, Mongolia, Nepal, Tajikistan, Turkmenistan, and Uzbekistan. Asia-Pacific least developed countries (LDCs) include: Afghanistan, Bangladesh, Bhutan, Cambodia, Kiribati, Lao PDR, Myanmar, Nepal, Samoa, Solomon Islands, Timor-Leste, Tuvalu, and Vanuatu.
*Aman Saggu is a Research Assistant in the Trade and Investment Division, United Nations Economic and Social Commission for Asia and the Pacific (
[email protected]). **Witada Anukoonwattaka is an Economic Affairs Officer, Trade and Investment Division, United Nations Economic and Social Commission for Asia and the Pacific (
[email protected]).
Trade Insights
Issue No. 6
Introduction: The Commodity Price Crash International commodity prices fell sharply over the second half of 2014. Oil prices in particular declined over 50% between June 2014 and December 20142. This has been described as “the biggest [financial] shock for the global economy this year [2014]” (Giles, 2014) and is likely to disrupt global trade flows in 2015. These events have substantial implications for economies in the Asia-Pacific region – which account for around a third of global commodity imports and exports. The impact on least developed countries (LDCs) and landlocked developing countries (LLDCs) is of particular concern because many of these countries have export-portfolios and economies which are highly dependent on just one or two commodity exports. In fact, a recent paper found that across nine Asia-Pacific LDCs, 95-100% of total export receipts were derived from just three products (see Edo and Heal, 2013). The consequences for these countries may be substantial because it could result in: currency depreciation; a decline in foreign exchange earnings; a fall in export revenues; growth volatility; lower inflation; and an increase in poverty if they are dependent on employment in commodity-related industries. These countries may also be characterized by the „natural resource curse‟ – a phenomenon whereby natural resource rich nations tend to experience lower economic growth than comparable natural resource poor nations3. The recent fall in international commodity prices (June 2014 to January 2015) extended across all commodity sectors, including energy (50% decline), metals and minerals (16% decline) and agriculture (7% decline). In the energy sector, oil and gas prices fell 37-54%. In the minerals and metals markets, coal, copper, lead, tin and prices fell 12-24%, while iron ore prices plunged 47%. In the agricultural sector, corn, cotton, palm oil, and soybean prices also fell 12-26%4. To highlight the severity of these price declines, in January 2015, the Baltic Dry Index – a measure of global shipping costs for commodities – fell to a 28 year low (Christie, 2015). World Bank (2015) forecasts indicate that commodity prices will continue falling in 2015. IMF (2014) forecasts similarly expect energy prices to continue declining in 2015 however their outlook on the performance of agricultural commodities is more mixed. The Role of Commodities in Asia-Pacific Economies The overall impact of falling commodity prices on individual countries in the Asia-Pacific region depends upon the nature of their commodity trade (i.e. net commodity-exporting or net commodity-importing). It also depends upon the specific macro-financial conditions present in each country, as well as the fiscal stance with regards to fuel and agricultural subsidies. In general, for net commodity-exporting countries, a fall in commodity prices would be expected 2
Calculated using data from the Bloomberg Markets Website. ICE Brent Crude prices fell from a high of $115.71 on 19th June 2014 to $61.01 on 16th December 2014. 3 A recent UNESCAP working paper identifies three channels which could lead to a negative relationship between high levels of natural resource and lower levels of economic growth. This includes (a) the Dutch disease – when real currency appreciation leads to a decline in non-natural resource sectors due to lower competitiveness, (b) higher volatility in terms of trade which may lower the overall efficiency of economic activities, and (c) competition over control of natural resources which could weaken governance structures and result in sub-optimal spending of revenues (see Avalos, N., Stuva, V.G., Heal, A., Lida, K., and Okazoe, N., 2013). 4 It is important to note that the prices of some commodities actually increased. In the metals and minerals market; zinc, aluminum and nickel prices increased due to export bans and supply side issues. In the agricultural market; orange, cocoa, cattle and coffee prices increased due to issues relating to crop failures and the weather.
2
Trade Insights
Issue No. 6
to result in lower economic growth prospects, currency depreciation, a decline in export revenues and a deterioration of the current account. In extreme cases, countries have attempted to control capital outflows and currency depreciation using tighter monetary policy and foreign exchange interventions (e.g. Russian Federation in December 2014)5. This has substantial implications for the Asia-Pacific region, because it contains many commodity-exporting economies – and accounts for over a quarter of global fuel and metal exports, as well as over a third of global mineral exports (figure 1). At particular risk are Australia (which accounts for 28% of global mineral exports) and the Russian Federation (which accounts for 11% of global fuel exports). These two economies play a dominant role in the exports of global commodities and are the main commodity-exporters within the region (table 1). Due to the scale of their operations, they are likely to experience substantial declines in export-revenues following the recent collapse in commodity prices. Outside of the AsiaPacific region, the European Union is also an important market, and although it has decreased its share of global commodity exports, across all sectors, over the last five years, it remains the largest exporter of agricultural products and metals in the world. Within the Asia-Pacific region, LDCs and LLDCs (a total of 21 countries) accounted for less than 2% of global commodity exports and 7% of Asia-Pacific commodity exports – shares which have not changed substantially over the last five years. This suggests that these economies are price takers in the global commodity market because they have a very low market share. It also implies that they cannot influence global commodity prices through supply-side restrictions.
100% 90% 57% 58%
60% 40%
44% 41%
13% 13%
30% 20%
41% 38%
10% 8%
39% 41% 27% 26%
10%
Fuels (2013)
Fuels (2009)
Minerals (2013)
0%
European Union Other Asia Pacific
22% 23% 10% 12%
Rest of the World
15% 17%
Asia Pacific LDCs & LLDCs China
Agriculture (2013)
50%
38% 38%
Agriculture (2009)
47% 48%
Metals (2013)
70%
26% 27%
Metals (2009)
80%
Minerals (2009)
Percentage of Total World Exports (%)
Figure 1: Geographical structure of total world commodity exports, 2009 and 2013
Source: ESCAP calculation based on Comntrade data accessed through World Integrated Trade Solution, (2015). Notes: Product groups are defined using the HS2007 classification with mirror data. Clusters include: 2526_Minerals, 27-27_Fuels, 72-83_Metals, WTO_H3_Agrri and Total. 5
This approach should be used with caution as foreign exchange interventions are typically ineffective at curbing financial market volatility (see Lavigne, 2008). In fact, the Russian Federation used more than $80billion of reserves to defend their currency, yet unable to control the depreciation. Their capital outflows doubled to $151.5bilion in 2013 (Reuters, 2014).
3
Trade Insights
Issue No. 6
Table 1: Main Asia-Pacific commodity exporters (% of world trade) Largest Exporter 2nd Largest Exporter 3rd Largest Exporter Minerals (28%) Australia (3%) Indonesia (2%) Russian Federation Fuels (11%) Russian Federation (2%) Australia (2%) Malaysia Metals (12%) China (7%) Japan (4%) Korea (Republic of) Agriculture (3%) China (3%) Australia (2%) Indonesia Source: ESCAP calculation based on Comntrade data accessed through World Integrated Trade Solution, (2015) Notes: Product groups are defined using the HS2007 classification with mirror data. Clusters include: 2526_Minerals, 27-27_Fuels, 72-83_Metals, WTO_H3_Agrri and Total.
The impact of falling commodity prices on the economy of a country depends on the net commodity export position of a country in relation to the size of the economy. Across the 58 Asia-Pacific economies, 18 were in a net-export position in relation to commodities in 2013 (figure 2). This ranged from a commodity-trade surplus worth 0.11% of GDP in Myanmar to 59% of GDP in Brunei Darussalam. Export revenues and economic growth are likely to be negatively impacted in these countries over the next year due to the recent fall in commodity prices. On average, net commodity-exports accounted for around 14% of GDP across these 18 economies. The most impacted (above the average) economies include fuel-exporting economies (Azerbaijan, Brunei Darussalam, Kazakhstan, the Russian Federation, and Turkmenistan) and mineral-exporting economies (Nauru). Figure 2: Net commodity exporters, 2013 (% of GDP) 70% 60% 50% 40% Minerals 30%
Fuels Metals
20%
Agriculture Average
10%
Total Myanmar
Armenia
New Caledonia
Papua New Guinea
Korea, Dem. Rep.
Indonesia
Timor-Leste
Iran, Islamic Rep.
Mongolia
New Zealand
Malaysia
Australia
Kazakhstan
Nauru
Russian Federation
-30%
Turkmenistan
-20%
Azerbaijan
-10%
Brunei Darussalam
0%
Source: ESCAP calculation based on Comntrade data accessed through World Integrated Trade Solution, (2015) and the World Bank Database, (2015). Notes: Product groups are defined using the HS2007 classification with mirror data. Clusters include: 2526_Minerals, 27-27_Fuels, 72-83_Metals, WTO_H3_Agrri and Total.
4
Trade Insights
Issue No. 6
The Role of Commodity Exports in Asia-Pacific LDCs and LLDCs In terms of the global commodity market, the imports and exports of Asia-Pacific LDCs and LLDCs play a relatively minor role. Nevertheless, commodities constitute a major component of their export portfolios. Across these economies, fuels are the largest component of total exports (47%), followed by textiles (24%), metals and minerals (13%) and agricultural commodities (6%). Hence commodities (fuels, metals and minerals and agricultural commodities) account for around two thirds of total commodity exports. The composition of these export portfolios have not changed substantially over the last five years (2009 to 2013). Table 2: Shares of commodities in total exports Country Timor-Leste Azerbaijan Turkmenistan Kazakhstan Tajikistan Bhutan Mongolia Uzbekistan Armenia Myanmar Lao PDR Afghanistan Samoa Kyrgyzstan Solomon Islands Vanuatu Nepal Cambodia Tuvalu Bangladesh Kiribati
All Commodity Exports 99% 92% 88% 82% 80% 74% 74% 55% 45% 41% 35% 33% 21% 18% 17% 13% 12% 5% 1% 0% 0%
Largest Commodity Export (95%) Crude Oil (90%) Crude Oil (82%) Natural Gas (66%) Crude Oil (56%) Aluminum (71%) Iron Ore/Steel (31%) Coal (20%) Natural Gas (23%) Copper (35%) Natural Gas (29%) Copper (18%) Cotton (8%) Orange Juice (10%) Copper (13%) Gold (6%) Iron Ore/Steel (9%) Iron Ore/Steel (3%) Rice (1%) Aluminum (
