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Market Volatility
Commodity prices drive differentiation within EMD
Kirstie Spence
Portfolio Manager
  • The rise in commodity prices is a key channel through which the conflict in Russia/Ukraine might affect the rest of emerging markets (EM). If commodity price increases are sustained, it is likely to support external balances of EM commodity exporters, but could weigh on manufacturing exporters.
  • Latin American commodity exporters should benefit the most from the shock to commodity prices, while countries Central/Eastern Europe and Turkey could suffer the most. 
  • EM exchange rates (FX) have tended to be positively correlated with commodity prices in the past, although this relationship seems to have reversed now, possibly reflecting a supply driven shock rather than a demand driven rise in prices.

Spike in commodity prices

A key channel of contagion to fixed income markets outside of Russia/Ukraine is likely to be through commodity prices. Russia is the largest exporter of natural gas and the second-largest exporter of crude oil and petroleum products. The US has now banned Russian oil imports and the UK said it will phase them out by year end. As a result, Brent oil prices have crossed US$110/bbl for the first time since 20141. Both Russia and Ukraine are important food commodity exporters and with Russia and Ukraine accounting for roughly 30% of the world’s wheat exports, wheat prices are at decade-high levels. Russia is also an important exporter of nickel, palladium, and titanium. In this paper, we look at how the increase in commodity prices might affect EM debt markets. 

Macroeconomic impact of a supply driven shock to commodity prices

1. Economic growth: Tighter supply of commodities risks exacerbating supply chain bottlenecks in the global economy, while a decline in real income (initially via private consumption because of higher prices and with a lag through trade as a second income shock) will impact consumer spending on the demand side. Both of the effects will negatively impact economic growth. The reverse is true for net oil exporters as the value of exports increases, raising the economy’s profits and wages. In countries in which domestic oil prices are heavily subsidised, a rise in international oil prices will likely have a limited effect on demand or supply.

2. Inflation: The direct impact on inflation depends on the proportion of commodities in the consumer price basket. EM countries generally have a higher proportion of food and energy in their CPI baskets. As an example, food and energy make up nearly 60% of the CPI basket in India, compared to 22% in the US and 32% in the Euro area2. Another factor is government intervention. Many of the major oil exporters (such as Saudi Arabia and Kuwait) subsidise or regulate fuel prices and so higher commodity prices may not feed through to inflation as much.

3. Fiscal balance: For commodity importers, higher commodity prices can lead to a deterioration in fiscal accounts if governments subsidise commodity prices, such as in Indonesia. For commodity exporters, an increase in commodity prices will help the fiscal balance. Many EM exporters have significantly lower breakeven prices3 for oil than current prices. So, for example, Qatar only needs an oil price of $44 to break even, while Saudi Arabia needs an oil price of $674.

4. Current account balance: Commodity exporters should see an improvement in current account balances through better terms of trade. The chart below shows the net commodity exposure by country as a percentage of GDP. According to the chart, Russia, Chile, Malaysia, South Africa and Brazil are the largest beneficiaries of higher commodity prices, although they vary in the type of commodity that they are exposed to.


1. Source: IEA, Global EV Outlook 2021.

2. As at January 2022. Source: Inside EVs.

3. The price which would balance the budget

4. Source: IIF. Breakeven prices for 2022 budgets. As at 12 October 2021 

Risk factors you should consider before investing:

  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
  • Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.

Kirstie Spence is a fixed income portfolio manager at Capital Group. She has 27 years of investment industry experience, all with Capital Group. She holds a master’s degree with honours in German and international relations from the University of St. Andrews, Scotland. Kirstie is based in London.


Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

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