Commodity price cycles and implications Prof. Prasad explained that commodity prices are low partly for structural reasons, but there is a cyclical element added in as well. This creates difficulties for many commodity exporting countries, triggering both economic and political instability in those countries. “Oil prices are showing signs of recovery, easing some pressure on countries dependent on oil exports. But the ending of the commodity supercycle, combined with weaker demand as China seeks to rebalance its economy has left many commodity exporting states wrestling with reduced revenues as both export volumes and prices fall. But <strong>CFO</strong>s will have to continue wrestling with unstable commodities and currencies, and approach the future by hedging against high levels of volatility, while simultaneously balancing the challenges that this uncertainty will pose for business planning and development,” said Prof. Prasad. Mr. Francois Conradie, Head of Research at NKC African Economics, offered some detail on the dynamics of how economies with strong commodity reliance will experience a downward spiral of inflation and government borrowing. “The factors of low growth, falling numbers of jobs, high prices and a reduced ability of the government to be able to deal with the situation is a repeated phenomenon in a number of emerging markets and in particular Africa,” said Mr. Conradie. Drawing on the case of <strong>Dubai</strong>, Dr. Ali Al Sadik, Senior Economist and Project Manager at the <strong>Dubai</strong> Economic Council presented some thoughts on how these economies might strive for diversification, which would serve to break this cycle. The lessons of success from <strong>Dubai</strong> that he drew attention to were the level of leadership with vision, an able team and accountability within that team for delivery. “While the success achieved by the United Arab Emirates is remarkable,” said Mr. Conradie, “it is more difficult for countries with larger populations and greater dependencies on commodities to redirect their path to diversification, particularly if there are low currency reserves. He suggested that these countries would benefit more from trying to take advantage of their weak local currency against the US dollar. Dr. Sadik drew attention to an African success story that had achieved a change in its economic trajectory: “Ethiopia, for example, has seen an influx of foreign investment from companies seeking a low-cost location closer to European markets than China, and its manufacturing sector is showing remarkable growth,” he said. Awaiting Asian reforms “Reduced foreign currency inflows caused local currencies to fall in value, prompting central banks to raise interest rates in an effort to prop them up, even as the cost of imports rises,” said Prof. Prasad. “The knock-on effects have been manifold. One positive consequence is that many countries have begun to implement structural reforms in a bid to promote the development of industry and services to diversify their economies.” Economic growth in China and India, now two motors of the world economy, is likely to remain strong in the short term, said Prof. Prasad. He noted, however, that further ahead, there were questions over whether each country would press ahead with necessary reforms. China’s drive to rebalance its economy has made progress, but the pace of reforms in terms of state enterprise restructuring, freeing the labor market and lifting services sector restrictions has been slow. For India, meantime, “it’s a potentially golden time. All the circumstances are as good as they could possibly be — yet the speed of implementation of reform needs to accelerate,” said Prof. Prasad. “Productivity growth during this recovery has been exceptionally weak. If productivity doesn’t recover, then it is going to be very difficult to sustain good growth.” Oil and gas in emerging markets: finding a new way forward The global oil glut and the resulting sustained low prices have profoundly affected many emerging market economies. The consequences of this new energy order engendered by sustained low oil prices have already been extraordinary. What key changes and consequences are yet to come? Read more on ey.com/oilandgas. Prof. Eswar Prasad <strong>FT</strong>-<strong>EY</strong> <strong>Global</strong> <strong>CFO</strong> <strong>Forum</strong>: <strong>Emerging</strong> <strong>Markets</strong> <strong>2016</strong>, <strong>Dubai</strong> | 8
Making it happen The role of government
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