This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Mark McFarland, Global Chief Economist at Coutts gives his outlook for the commodity economies.
Brazil
Brazil was one of the major beneficiaries of global capital flows over 2010-12. The Brazilian real’s rise prompted the central bank to impose capital controls to stem its appreciation. As investors began anticipating tighter US monetary policy in 2013, Brazil’s twin fiscal and trade deficits (3% of GDP) left it exposed to outflows. It is unfortunate that this has coincided with an improvement in the country’s household and corporate debt profile. If commodity prices remain subdued, the central bank may not have to raise rates much above 9% and GDP growth may increase from under 1% in 2012 to 3% in 2015.
Russia
We expect Russia’s GDP growth rate to recover from around 2% this year to just over 3% in 2015. Russia needs the oil price to stay above $110 per barrel to help it balance its budget. If oil prices were to decline substantially, Russia’s ability to embark on much-needed public infrastructure projects would be impeded and the ruble would come under selling pressure. This is not our expectation as geopolitical risk remains high in the Middle East and North Africa (MENA), and the country’s current account surplus (3% of GDP) makes the ruble fairly resilient. This currency resilience potentially makes Russia’s shorter-dated local currency bonds attractive as the central bank is not expected to start raising interest rates until well into 2015.
Gulf Cooperation Council (GCC)
Growth in the GCC has taken off, helped by capital flows from the northern Middle East and North Africa countries (MENA). Property prices are rising quickly again after four years of underperformance. Equity markets have risen briskly all year as the region’s dollar-pegged currencies avoided the sell-offs in emerging and frontier markets. However, inefficient infrastructure and a lack of private sector competition have constrained growth to 4%.
Dubai has successfully tackled both issues and now has a much more diverse economy that will continue to attract professionals and high-net-worth individuals. Infrastructure
projects will continue in the rest of the region.
Australia
Australia’s challenge over the next few years will be to insulate itself from China’s business cycle. The Australian dollar was hit hard when China’s data slowed in the second quarter and has since recovered as evidence suggests China’s outlook has improved. The central bank has indicated there could be one more quarter-point rate cut to come, but rates should start to move upwards in line with the US scaling back QE. As such we don’t see much more downside risk to the currency, which makes Australian government bonds at 4.3% some of the best yielding in developed markets.
