Developing Economies and Petrocurrencies in 2018

In many developing and rentier states, a large sector of the national economy is dependent upon the exploitation of one or two natural resources that are exported as commodities. Therefore, the national currencies of these countries tend to be highly dependent on the international market pricing of these commodities. In the case of countries whose economy is highly dependent on the export of oil, such as the members of the Organization of Petroleum Exporting Countries (OPEC), their currencies are often referred to as petrocurrencies. However, this category is not limited to developing regions, given that a country like Canada also has a currency dependency on commodities, particularly oil and gas.

Developing Economies and Petrocurrencies in 2018

Petrocurrencies and other commodity-backed national currencies have been particularly hard hit in recent years as the price of the barrel of crude oil has sharply declined, reaching a low-point of less than US$30 during January 2016. Nevertheless, in recent months, after years of production cuts by the world’s major petroleum producers, international prices have finally begun to rise gradually. Even though they are still far from the more than US$150 per barrel pricing from June 2008, as of December 2017 the closing price per barrel of crude oil was of approximately US$60. If this trend continues, it is expected that it will trickle-down and strengthen the value of petrocurrencies. Similarly, if the currencies of these countries strengthen substantially, it will negatively affect national exports, while benefiting domestic wage earners and consumers. Likewise, such a trend will strengthen the assets of foreign investors already present within the target country and make it more expensive for other foreign investors seeking to enter these national markets. Thus, international investors should consider what the effect of rising commodity prices might be in emerging regions and take advantage of the current window of opportunity.

Meanwhile, two of the ways in which countries can protect themselves against currency fluctuations and inflation are by pegging their currency or by joining a monetary union. For instance, throughout Latin America and the Caribbean, numerous countries have pegged their national currencies to the United States Dollar (USD) or outright made the USD their national currency, as is the case in Panama, Ecuador, and El Salvador, amongst others. Similarly, countries can form or join a monetary union with other nations in order to diversify the economic activity backing the currency, which mitigates the risk of currency fluctuation as long as monetary policy is disciplined. This is the case of the two Franc CFA regions in Africa, the Economic and Monetary Community of Central Africa as well as the West African Economic and Monetary Union. These monetary unions bring together some fourteen countries that use a common and stable currency with a fixed exchange rate against the Euro.

(Read more about Economic Outlook for the United States in 2018)