Oil volatility drives EMD funds out of exporters
Countries such as Mexico and Colombia affected
Extreme oil price volatility in recent weeks has pushed hard-hit emerging markets bond funds to cut exposure to exporter sovereigns and lengthen portfolio duration amid concerns that even more countries fighting the economic impact could see credit rating downgrades.
WTI Crude futures dipped as far as $30 into negative territory for the first time in history in April, largely due to reduced demand for the May contract and limited purchaser storing space, which was then followed by heavy falls in Brent Crude futures.
Since then prices have remained volatile, with oil futures continuing to trade well below historical levels at $17 and $24 a barrel for WTI Crude and Brent futures respectively at time of publication.
Oil traders are reportedly now extending the duration of their oil futures positions, with contracts up to July looking unfavourable, suggesting oil will remain well below historical levels for the immediate future.
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Andrew Lake, head of Mirabaud Asset Management £1.3bn AUM fixed income portfolios, noted the impact on spreads is most visible in "poorer, oil export dependent countries", which have been forced to borrow heavily to counteract the affects and "will have to seek help from international bodies" such as the International Monetary Fund.
A number of emerging markets nations have already seen credit ratings cuts, including Mexico, Colombia and South Africa, while current and former high-profile figures in both Saudi Arabia and India have warned about the potential for the same to happen to their own countries.
Fiscal breakevens
Lake explained the Saudi economy's breakeven point for oil is $80 a barrel and "smaller countries have already started to look at re-profiling their debt burdens and we will likely see more of this".
He added while Mirabaud will "continue to own some oil exporting countries where we feel the effect of the price of oil will not cause a default or longer term permanent damage", net importers of oil such as Indonesia, India and China "will benefit from current prices".
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Nachu Chockalingam, senior emerging market debt portfolio manager at Federated Hermes, agreed oil importers, particularly those in Asia, should be well set to benefit from the oil price collapse, and that it was important to make a distinction between oil exporters "better placed to withstand this volatility than others".
"We think about this in the context of looking at fiscal breakevens," she explained. "In general, the fiscal breakeven is probably in the range of $40 to $100.
"Russia would probably be to the lower end of that, and some of the Middle Eastern countries would be to the higher end of that."
Chockalingam, who noted that oil price volatility had driven greater investor appetite for "higher quality sovereigns", bond spreads of which have "more room to retrace" than others, warned that "any commodity exposed and fiscally constrained country…are at risk of rating actions being taken against them".
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