Emerging markets gain from OPEC cut

Emerging markets gain from OPEC cut

By David Chance

LONDON (Reuters): Major oil exporters from the emerging market
universe such as Russia, Venezuela, Colombia, Ecuador and Nigeria
will win from OPEC's decision to cut its output, but some
producers may be losers as countries like Mexico may have as much
to fear from high prices as gain.

OPEC on Wednesday agreed to cut daily oil production by 1.5
million barrels per day to 25.2 million.

The prospect of cuts has caused a rebound in prices for the
benchmark Brent crude blend, pushing it to US$25 a barrel, some
$2-$5 more than many emerging market analysts had been
forecasting for the first quarter of 2001.

The rise is obviously bad news for major importers such as
Brazil, South Korea, Thailand and Ukraine, but for emerging
markets such as Mexico, which are highly dependent on growth in
the stuttering U.S., rising oil prices are a double-edged sword.

"The impact on Mexico is hard to discern, as though higher
prices help the fiscal balance, they hurt the U.S. and therefore
Mexico by direct association," WestLB emerging market strategist
Sara Zervos said in a note to investors on Wednesday.

"Thus, investors are feeling a little concerned over Mexican
assets at the moment," she said.

The latest figures show that Mexico exported 1.697 million
barrels per day in November.

Mexican debt has lagged the emerging debt universe this year,
with the Mexican portion of the industry benchmark JP Morgan
Emerging Markets Bond Index down 0.06 percent this year, compared
with an almost two percent gain on the EMBI Global index.

Two other producers, Venezuela and Nigeria will win on the
fiscal front, in the form of higher government revenues and
stronger balance of payments, but could be losers as the impetus
to reform dies.

In Venezuela, where oil accounts for 80 percent of hard
currency earnings, the oil economy grew 3.4 percent in 2000 due
to a price boom which saw Brent hit a $35 high in October.
The balance of payments surplus in 2000 was six times higher at
$6.1 billion.

"It means they do not have any fiscal problems but it does not
help them in the longer term with reforms," said Jerome Booth,
head of research at Ashmore Investment Management.

Russia, though, has managed an effective economic reform
program through 2000 and looks certain to continue in 2001, using
oil as a cushion to buy time to restructure.

"In Russia there is an internal will to reform, whether it
continues depends on the battle in President (Vladimir) Putin's
head," said Richard Segal, head of sovereign research at
consultancy Emerging Market Economics.

High oil prices in 2000 were a major contributory factor in
interest rate hikes in the emerging economies of central and
eastern Europe, even though many countries do not have big oil
import bills.

South Africa and Poland are respectively the fifth and seventh
largest coal producers and therefore not as dependent on oil
imports as countries such as Brazil or South Korea.

A rise in inflation means that central banks are forced to
adopt tighter monetary policy and degrades growth prospects, thus
putting pressure on budgets in the medium term.

Ashmore's Booth said that among large importers such as South
Korea and Brazil, high oil prices were not a disaster.

"In the case of Korea, it is no bad thing to have an external
impetus to reform, while in Brazil they managed to bring
inflation in at the bottom end of their range, despite rising oil
prices," he said.

Brazil's IPCA inflation index came in at 5.97 percent, below a
target of six percent in 2000.

Rising gasoline prices contributed 1.1 percentage points of
the inflation.

Looking forward, Ashmore's Booth said that oil would not
derail the improving credit story of emerging markets.

"It is important there is greater stability in oil prices and
the risk of major peaks has diminished now that winter is getting
out of the way," he said.