Currencies
Ranking the Top Commodity Exporters
July 21, 2008

By Stephen Jen & Luca Bindelli | London

Summary and Conclusions

Who is the biggest commodity exporter in the world?  In this note, we present a ranking of commodity exporters. 

Commodity prices and the global economy

Most commodity prices have remained buoyant, somewhat in contrast to decelerating global demand growth.  It is likely that supply and demand, as well as investment flows, have all contributed to these trends.  The future trajectories of the key commodities such as crude oil, base metals and soft commodities remain controversial and uncertain.  Oil prices, in our view, are key for monetary policy and fiscal policy, and act as a major source of wealth transfer between economies (see A Monumental Petro-Wealth Transfer, June 12, 2008).   Further, the oil price rise is likely to have significant medium-term effects on the growth prospects of some Asian economies (see The Energy Shock to Asia, July 3, 2008).  

Setting aside the factors driving commodity prices and the impact on the global economy, the focus of this note is to carefully rank the commodity-exporting countries on how commodity-intensive and reliant they are.  Further commodity price increases would obviously have positive effects on these economies, while major price declines would have negative effects on them. 

Our ranking

We created a summary ranking of the major commodity exporters.  We disaggregate trade balances (as a percentage of GDP) in different commodity categories:  energy, hard commodities and soft commodities, as well as non-commodity trade balances.  The countries are then ranked/sorted on the overall commodity trade surplus (across the three commodity categories).  We make the following observations:

•           Observation 1.  GCC countries dominate.   It is not surprising to see that the top five commodity exporters are from the GCC (Gulf Cooperation Council).  Bahrain is absent from this list because it is not nearly as well-endowed with hydrocarbon resources as its other GCC partners.  Qatar is blessed with the world’s third-largest natural gas reserves, with (25.6 trillion cubic metres (TCM)), ranking behind Russia (44.65 TCM) and Iran (27.8 TCM).  However, it is a relatively small country with a population of only about 1.5 million, 225,000 of whom are Qatari citizens; the overall GDP of Qatar is ‘only’ US$53 billion.  The modest domestic consumption of natural gas makes Qatar the world’s largest natural gas producer and, as a percentage of GDP, the largest commodity exporter in the world.  As a percentage of GDP, Kuwait, Saudi Arabia and the UAE are similarly positively supported by out-sized energy trade surpluses.  The UAE’s energy trade surplus is offset by its large trade deficit in non-energy goods. 

•           Observation 2.  Russia is a significant exporter of energy products in absolute terms, but not quite as dominant in percentage of GDP terms.   Russia’s energy trade surplus totals some US$121 billion a year, larger than those of Kuwait, Oman and Qatar.  However, the Russian economy is so much bigger than those of the GCC (Russia’s GDP is US$1.3 trillion, compared to the combined GDP of the GCC countries of US$715 billion) that its energy trade surplus is a much smaller proportion of its GDP.  Outside the GCC, Russia ranks behind Chile as a net commodity exporter. 

•           Observation 3.  Australia, New Zealand and Canada.  Among these three ‘dollar-bloc’ and commodity exporters, Australia is the largest net commodity exporter as a percentage of GDP (US$83 billion in 2007, or 9.1% of GDP), with a nicely diversified composition of commodity exports across energy, hard and soft commodities.  New Zealand runs a trade deficit in energy and a large surplus in soft commodities.  Like Australia, Canada’s commodity trade surplus is also nicely diversified across different types of commodities.  However, the overall size of the net commodity trade surplus (US$90 billion but only 6.3% of GDP) is more modest than that of either Australia or New Zealand. 

•           Observation 4.  The price (terms of trade) effect is important as well.  In addition to the commodity trade balance, the price effect is important as well.  Different commodities may experience vastly different price changes.  Indeed, since 2002, there have been very different performances among the various commodity groups and, as a result, different commodity exporters have enjoyed varying degrees of the terms-of-trade (ToT) shocks.  We analyse how these commodity exporters have faired since 2002.  Chile, Russia, Australia and Norway have enjoyed tremendously favourable ToT shocks.  Japan and Korea, on the other hand, have suffered from quite sizeable negative ToT shocks during this period. 

Currency trades from these observations

Besides buying commodity currencies when and if commodity prices rise further, and selling them otherwise, there are specific trading ideas based on this ranking:

1.         GCC currencies to broadly follow in China’s footsteps.   The debate on the GCC currencies is reminiscent of that regarding the CNY back in 2004.  In July 2005, Beijing semi-surprised the market with its 2.1% step revaluation in the CNY, but followed it with a three-year – and counting – gradual appreciation process that is akin to the ‘basket band and crawl (BBC)’ framework.  In this journey from a de facto fixed exchange regime toward an independent monetary framework, China has had to deal with capital inflows and other complications along the way, as it buys time to build up its tools for monetary and liquidity control.  We believe that the GCC currencies will broadly follow a similar path, as their starting points and ultimate ‘destinations’ are similar. 

2.         AUD and NZD to descend only very gradually in the short term.   The positive ToT shock has already had immediate effects on the AUD and NZD.  However, it also has indirect effects that will ‘linger’ in the economy, such as how high commodity prices may affect investment in expanding capacity in the mining and farming industries, transportation and infrastructure, which in turn will help to keep interest rates elevated even if the economies begin to decelerate.  Signs of an economic slowdown in New Zealand are definitive, and are beginning to show up in Australia as well.  But policy rates are likely to remain elevated for some time longer, because of the lingering effects of the positive ToT shock and positive demand effects from the likes of China.  AUD and NZD’s prospective descent will likely be gradual, as a result. 

3.         AUD and CAD look good from a long-term perspective.  CAD is well-balanced between the slowdown in the US (70% of Canada’s exports go to the US) and buoyant global commodity prices.  While a temporary correction in commodity prices may be negative for the CAD, from a structural (multi-year) perspective, CAD should be supported both because of the likely commodity price trend over this period and how an eventual recovery in demand growth in the US may help propel USD/CAD meaningfully below 1.00.  Similarly, AUD’s long-term outlook seems bright, given its commodities mix and the outlook of the Chinese economy (see AUD: Liquidity, Coal, and Carry, Is Parity within Reach?, April 25, 2008).  

4.         JPY and KRW should remain weak.   We share the view of our colleagues in Japan that Japan is experiencing ‘bad’ inflation, in the sense that it is experiencing a negative ToT shock. Korea has been hit by a similar shock. As we have written in the past, the energy shock is likely to be serious for Asia, and the economic effects of this shock will only become evident over time, as the energy subsidies are gradually removed.  The JPY and KRW should weaken because of this shock, all else equal. 

Bottom Line

We rank commodity exporters in this note.  The GCC currencies are likely to follow the footsteps of the CNY.  AUD and NZD are likely to descend only gradually, and the medium-term outlook of CAD appears quite positive.   Hit by the energy shock, JPY and KRW should not strengthen.

Denmark
Between a Recession and a Hard Currency
July 21, 2008

By Elga Bartsch | London

It’s official: Denmark has entered a technical recession.  With GDP falling 0.2%Q in 4Q07 and a further 0.6%Q in 1Q08, full-year GDP growth will likely be flat this year, making Denmark one of the weakest European economies, on our forecasts.  Even a negative growth rate for the full year can no longer be ruled out, given that the headwinds are still gaining momentum.  The Danish downturn is led by a sharp contraction in both consumer spending and construction investment, reflecting a housing boom going into reverse with house prices having already eased more than 6% from their late 2006 peak.

Given that the DKr is pegged against the EUR, we see little scope for an independent monetary policy reaction.  On the contrary, a renewed softness in the DKr could potentially force the Danish National Bank to raise interest rates more aggressively than the ECB.  Already in May, the DNB raised its lending rate from 25bp over the ECB refi rate to 35bp.  Forced to follow the ECB by its commitment to the exchange rate peg, the DNB will likely add to the near-term woes of the Danish economy, in our view.

Some payback for the past boom.  In the past, Danes have enjoyed a steeper rise in house prices and a sharper fall in unemployment, and have accumulated more mortgage debt than other European countries.  As in the UK, Ireland and Spain, economic sentiment in Denmark has dropped below par.  While we expect this continue as the weak growth situation dawns on the Danish consumers and companies, we note that somewhat bigger divergences in sentiment have been experienced in the past, notably in 1998/99 and 1991/92. As a consequence of the economic downturn, we expect unemployment to rise from a recent low of 2.7% of the labour force to 3.6% by the end of next year.

The inflation differential with the euro area is minimal and the outlook quite similar thanks to the dominant influence of energy and food-related dynamics.  That said, the Danish economy shows much more signs of capacity constraints hampering growth and boosting inflation than the euro area does.  Unemployment has been hitting one record low after another in Denmark.  The output gap, which measures the deviation of current GDP from potential output, is deep in positive territory.  So, even without its peg, the DNB would probably pursue a similar policy as the ECB.  In fact, it might have acted earlier to fight off the obvious overheating of the economy in the last few years.  Taken together, an aggregate measure of the economic sentiment and inflation differentials, which allows measuring nominal growth differentials, shows relative limited discrepancies between Denmark and the euro area.

 

There is little scope for an independent monetary policy reaction as the DKr is pegged against the EUR in a narrow +/- 2.25% band.   In fact, a softer DKr could potentially force the Danish National Bank to raise interest rates more aggressively than the ECB, which just raised its refi rate to 4.25%.  Back in May, the DNB already had to raise its lending rate further above the ECB refi rate, bringing the spread from 25bp to 35bp.  Going forward, we believe that the DNB will be forced to follow the ECB due to its commitment to the exchange rate peg.  Depending on the currency market reaction to the news of the Danish economy slipping into recession, the DNB could be forced to add to the near-term woes of the Danish economy by the means of additional rate increases.  The extra 10bp rate hike by the DNB a few weeks ago in an environment with a relative narrow spread between the Danish and the ECB policy rate underlines this scenario.

Housing market boom in reverse …

The Danish housing market has reversed gears and nominal house prices have eased about 6% from their late 2006 peak.  While still flat in real terms, this is only third time in post-war history – the other times being 1987 and 1979 – that Danish house prices are in negative territory.  In the two earlier phases of housing market corrections, real house prices dropped by at least 10%.

Today, housing valuations are still stretched.  Denmark sports the second-highest ratio between house prices and income within the OECD, a full 57% above its country-specific long-term average.  Part of the Danish housing boom was driven by the interest rate convergence to the lower euro area level.  Another part was driven by a booming economy and record-low unemployment.  Finally, financial innovation, which allowed borrowing against rising housing values, has likely played a role too.

My colleague, David Miles, estimates that of the rapid increase in real house prices of around 123% between 1996 and 2006, some 52% was due to declining real interest rates and a further 40% can be traced back to real income growth (see European Economics: Financial Innovation and European Housing and Mortgages Markets, July 17, 2007).  A rise in housing supply (read construction boom) tempered house price increases by about 14% over the last ten years and caused the construction sector to become somewhat bloated.

… leaving consumers with a relatively high debt exposure 

As a result of the housing boom, household debt in Denmark, at 120% of GDP, is high by international standards.  Household debt has increased by one-third since the mid-1990s, which is still a modest increase compared with the increases seen in the US, the UK or Spain.  About two-thirds of this household debt is mortgages.  Leverage – i.e., liabilities relative to net wealth – is rather high in Denmark at around 45%, compared with 25% in the US and 20% in UK, according to OECD figures.  Overall, the level of mortgage debt seems rather elevated in Denmark.  Yet, the share of adjustable mortgages remains relatively low, with around less than one-third for new loans extended and less than one-fifth for outstanding loans. This should limit the negative repercussions of the rising interest rates somewhat, we think. But tougher times are ahead for Danish consumers.