News Column

Exchange rate regime key for exporting sovereigns' resilience to commodity price shocks

June 24, 2014

The strength of a country's fiscal institutions

and practices, as well as its exchange rate regime, will determine how

easily a sovereign heavily dependent on commodity exports can withstand

shocks in commodity prices, says Moody's Investors Service in a new

report. Overall, Moody's finds that a flexible exchange-rate regime

generally mitigates the effects of price shocks on a government's fiscal


"The high commodity prices recorded from 2000 to mid-2011 led to an

improvement in the fiscal metrics of a majority of commodity-exporting

economies," says L×Ēcio Vinhas de Souza, Moody's Managing Director and

Sovereign Chief Economist in the report "Commodity-Exporting Sovereigns:

Fiscal Practices and Exchange-Rate Regime Determine Resilience to Price

Shocks." "The commodity dependency of many resource-abundant countries,

however, has also increased, thereby heightening their economic and

fiscal vulnerability to adverse commodity price shocks."

As measured by the ratio of commodity exports to total exports, Moody's

finds that the dependency on commodities rose in 55 out of the 75

countries it studied in the period 2001-12 as compared to the period 1991

- 2000.

A Moody's regression analysis shows that increases in commodity prices

overall have a negative effect on the debt ratios for exporters of

agricultural raw materials and metals, but a positive effect on the debt

ratios for fuel exporters.

Overall, Moody's finds that flexible exchange-rate regimes mitigate the

effects of commodity export price shocks on governments' fiscal balances,

even though the debt-to-GDP ratios of countries with flexible exchange

rates show more sensitivity to commodity price changes than do those with

fixed-rate regimes.

Moody's also finds that countries that have fiscal rules or sovereign wealth funds (SWFs) are more resilient to an adverse commodity price

shock than those that do not.

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Source: EMBIN (Emerging Markets Business Information News)

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