Asia gains from low oil prices

AFTER five years of coping with oil prices that hovered between US$100 and US$120, prices tumbled in June 2014. Since then, the price of Brent crude oil - the global benchmark - has fallen 50 per cent to about US$55 as at the end of March this year. That drop is partly because of weak economic activity but most of it appears to be caused by the growing glut of supply, particularly from the US.

Investors have reacted accordingly by shunning emerging markets, where many countries are oil exporters. The JPMorgan Corporate Emerging Markets Bond Index, which tracks US-dollar denominated bonds issued by companies in emerging countries, has underperformed developed markets. The oil and gas sub-sector has recorded a -5 per cent return since July 2014. Equity markets have also felt the pain, with the MSCI Emerging Markets Index declining 10 per cent.

But the rout masks the divergence between different emerging markets. Many Latin American economies are vulnerable because they are net oil exporters. Some of them have relied on high oil prices to mask mismanagement and to pay for costly foreign adventures. In Venezuela, oil accounts for more than 95 per cent of its export revenues, which help fund heavy welfare spending. Inflation is well above 60 per cent.