Oil exporters and other commodity producers face years of pain from falling prices, with the slowdown in growth expected to be bigger than in previous cycles, the International Monetary Fund has warned.


An IMF study says countries such as Saudi Arabia, Russia and Brazil were likely to experience a "much larger" fallout from the end of a China-fuelled commodity boom and oil glut that would go "beyond the decline already experienced."

The Financial Times reported on Monday that Saudi Arabian Monetary Agency’s foreign reserves have slumped by nearly $73bn since oil prices started to decline last year as the kingdom keeps spending to sustain the economy and fund its military campaign in Yemen. The central bank is also turning to domestic banks to finance a bond programme to offset the rapid decline in reserves.

According to FT Advisor on Monday: "A recent study by research and consultancy group Wood Mackenzie shows that final investment decisions in upstream energy equivalent to 20bn barrels of oil will be deferred as a result of the rout in prices this year. Given annual global production is approximately 34bn barrels, that is a significant amount of deferral.

This equates to a $200bn (£129bn) hole in the industry’s investment pipeline. More than 50% of those cuts come from deep-water projects and nearly 30% from Canadian oil sands. The lead times for these projects are long. Once deferred, these ventures will not come back on stream quickly."

The IMF study, published in the forthcoming 2015 World Economic Outlook, suggests that the recent declines in commodity prices could shave off one percentage point annually from the growth rate of commodity exporters over 2015-17 as compared with 2012-14. In exporters of energy commodities, the drag is estimated to be even larger — about 2¼ percentage points on average.

This slowdown is not just a cyclical phenomenon, the study finds. “It has a structural component as well,” says lead author Oya Celasun, deputy division chief in the Research Department. “Investment, and accordingly, potential output, tend to grow more slowly in exporters during commodity price downswings.”

The decline in potential growth exacerbates the post boom slowdown, Celasun says. “This means that policymakers in commodity-exporting countries must go beyond demand-side measures and tackle structural reforms to improve human capital, increase investment and, ultimately, unleash higher productivity growth.”

Metal price changes

Upswings and downswings

oil price slump GDPThe study says commodity prices are unpredictable and can be very volatile. They can remain high or low for prolonged periods, giving the impression that their levels are permanent, only to exhibit very sudden and large changes.

Recent history is no exception. The first decade of the 2000s saw a persistent surge in commodity prices from record lows in the mid-1990s to record highs by 2011. More recently, however, the prices of commodities have fallen again, some in a dramatic fashion, and are expected to remain weak for some time (Chart 1).

Procyclicality, a common concern

In commodity-exporting economies, output growth, and economic developments more broadly, are unavoidably driven by commodity price cycles. To understand the channels better, the study examines data for more than 40 commodity exporters in emerging and developing economies for the last 50 years. It finds that output and, particularly, investment grow faster during commodity price upswings than in subsequent downswings (Chart 2). Much of this cycle reflects a strong investment response in the commodity-producing sector itself, which spills over into supporting industries such as construction, transportation, and logistics.

But it also reflects other mechanisms. In countries that rely heavily on resource revenues, fiscal policy is often procyclical with respect to the terms of trade. Government spending tends to increase when commodity terms of trade are improving, influencing economic activity more broadly. At the same time, governments, firms, and households in commodity-exporting economies all tend to borrow more easily during commodity booms than during downturns, amplifying the economic cycle set in motion by commodity prices.

Cyclical trends versus structural shifts

commodity prices, IMF, GDPThe IMF says the appropriate policy responses depend not only on the extent of the growth slowdown but also whether commodity-price-related fluctuations in output are mostly structural or cyclical in nature. That is, policies would have to be designed differently if commodity price changes affect potential output and not just the cyclical fluctuations around it.

The study finds that both cyclical and structural factors tend to be at play during commodity-price driven fluctuations in output growth. On average, about two-thirds of the decline in output growth in commodity exporters during a commodity price downswing is cyclical, and one-third is structural, reflecting lower potential growth. This means that for commodity exporters that have enjoyed a prolonged surge in commodity prices, the recent slowdown also reflects weaker growth potential, as investment growth collapses.

What to expect going forward

What does the behaviour of economic activity during past commodity price cycles imply for the current downswing? While the size and duration of the 2000s commodity boom exceeded its historical average, its reversal could lead to a sharper slowdown now. However, a typical commodity exporter is now better equipped to deal with a downswing than in earlier episodes.

Despite the more pronounced commodity price boom, growth rates over the last decade have been in line with earlier boom episodes and inflation rates have remained more subdued. This suggests that macroeconomic policies were more successful in smoothing the impact of the commodity windfall than in the past, as there was less of a growth boost than one would have expected given the size of the increase.

More specifically, fiscal policy has been less pro-cyclical—allowing for greater savings out of resource revenues—exchange rates have been more flexible, and financial depth has increased relative to the earlier episodes. All these factors were associated with smaller drops in output growth during previous downswings.

In addition, commodity exporters are entering the current downswing with stronger external positions, which can also help mitigate the effect of the commodity price downturn on their economies.

What are policymakers to do

The findings of the study imply that the growth slowdown in the immediate aftermath of a commodity price boom most likely represents a return to a more sustainable level of output. At the same time, slowing investment and economic capacity can lead to lower potential output growth.

Policymakers in commodity exporting countries therefore need to be careful not to overestimate the extent of excess capacity in their economies. A significant deceleration in growth rates is unavoidable for many economies.

Looking beyond the current juncture, the findings suggest that more flexible exchange rates and policy frameworks that avoid excessive pro-cyclical fiscal spending can help policymakers smooth the impact of commodity price swings on their economies.

Where growth is disappointing, the IMF says policy efforts that focus on structural reforms to foster sustained medium-term growth are likely to be very fruitful. The structural reform priorities vary across countries, but removing infrastructure bottlenecks, improving the business climate, and enhancing the quality of education are common goals across many.

The authors of this study are Oya Celasun (team lead), Aqib Aslam, Samya Beidas-Strom, Rudolfs Bems, Sinem Kılıc Celik, and Zsoka Koczan, with support from Hao Jiang and Yun Liu and contributions from the IMF Research Department’s Economic Modeling Division and Bertrand Gruss.

Pic on top: A Petronas oil platform off Malaysia.