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2
• Different theories have tried to explain commodity price behavior. For the case
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of oil…
‒ Super Cycles of Commodity Prices (Erten and Ocampo, 2013):
There is a gradual change in prices long-term trends rather than a stochastic trend.
During the period 1865-2010, four past super cycles are identified, ranging between 30
to 40 years and with large amplitudes varying between 20% and 40% higher or lower
than the long run trend.
80
300
Peru Colombia
70
250
Mexico Chile
60
200
50
40 150
30
100
20
50
10
0 0
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19
Goldman Sachs Commodity Price Index vs. FED Real Interest Rate
Annual, 1970-2017
1,2
The sector with the strongest correlation is cattle.
1
Other sectors with a strong correlation are copper,
corn, hogs and soybeans.
Log Real Commodity Price Index
0,8
0,6
0,4
y = -0,0342x + 0,7653
0,2
0
-2 0 2 4 6 8 10
FED Real Interest Rate (%)
5
Source: World Bank, Bloomberg
*Frankel, Jeffrey A., Commodity Prices, Monetary Policy, and Currency Regimes (May 2006). NBER Working Paper No. C0011. Available at SSRN: https://ssrn.com/abstract=913304
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6
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• …The negative correlation between an increase in real interest rates and a
decrease in real prices of commodities occurs through a variety of
mechanisms (Frankel, 2006):
• In its empirical study, Frankel finds that when the FED real interest rate goes
up by 1 percentage point, it lowers the real commodity price index by 6
percent…
7
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• Nevertheless, many other factors beyond real interest rates influence
commodity prices (e.g. weather, political conditions in producing countries,
sector specific microeconomic factors, etc.).
8
• External financial conditions remain volatile…
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Market-Implied Probabilities for the FED's December/2019 Meeting
100%
90%
80%
77%
70%
62%
60%
50%
40%
30%
39%
38%
20%
10%
0%
May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19
o Central bank monetary policy responses in developed economies are still uncertain and volatile
o Global trade, investment and output remain under threat from ongoing trade tensions
o Some downside risks in systemic economies such as the euro area, China and the United States persist
9
o Political uncertainty and geopolitical conflict in some countries also add downside risk to global
investment
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• Hence, if there is a relationship between financial conditions and commodity
prices, external volatility could generate terms of trade shocks.
10
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Contents
Global financial conditions and commodity prices
11
• In a vast number of countries, commodities are a key part of the national
economy...
Commodity exports (% Total exports) 2018
chiefly by material.
12
2 The latest available data for Venezuela are as of 2013 and for Saudi Arabia are as of 2016.
40
60
80
20
0
100
120
140
160
Mar-10
Jun-10
Sep-10
Fuente: Bloomberg
Dec-10
countries…
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Chile
Dec-12
Mar-13
Jun-13
Sep-13
Colombia
Dec-13
Mar-14
Jun-14
Peru
Sep-14
Dec-14
Mar-15
Jun-15
Mexico
Terms of Trade (2010=100)
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Argentina
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17
Mar-18
Jun-18
Sep-18
Dec-18
Mar-19
• …Commodity price behavior affects terms of trade in commodity exporting
13
• …Commodity prices are highly volatile; in particular non-renewable
commodities (e.g. oil, energy and metal prices)…
400,00
350,00
300,00
250,00
200,00
150,00
100,00
50,00
0,00
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Energy Agriculture Metals & Minerals
120,00
100,00
80,00
60,00
40,00
20,00
0,00
1879
1882
1885
1888
1891
1894
1897
1900
1903
1906
1909
1912
1915
1918
1921
1924
1927
1930
1933
1936
1939
1942
1945
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
Source: BP Statistical Review of World Energy June 2018 15
1861-1944 US Average; 1945-1983 Arabian Light posted at Ras Tanura; 1984-2017 Brent
• ..Shocks to commodity prices may be large, difficult to predict and with
variable persistence over time...
The solid line represents actual WTI crude oil daily prices for the period. The dashed lines are based on market projections for prices of WTI Futures Contracts from 1 month to the last data available of 2023 for some selected
transaction dates when WTI prices reached a peak or a trough (the futures curve generally starts two months after this).
16
• …Oil price shocks imply highly volatile government revenues. Oil dependent
countries are more sensitive to oil price volatility than oil importers...
30,00% 140,00
25,00%
120,00
20,00%
15,00% 100,00
10,00%
80,00
5,00%
60,00
0,00%
-5,00% 40,00
-10,00%
20,00
-15,00%
-20,00% 0,00
Source: IMF
Oil exporters: Bolivia, Canada, Colombia, Ecuador, Iraq, Mexico, Nigeria, Oman, Peru, Sudan, United Arab Emirates, Norway, Kuwait, Qatar, Australia, Saudi Arabia. Oil Importers: Austria, Belgium, Germany, Spain, France, United Kingdom,
Japan, United States, Switzerland, Argentina, Brazil, Hungary, India, Poland, Turkey, Thailand, 17
• …Because of difficulties in fully hedging against commodity price
fluctuations, commodity dependent countries take precautionary measures,
such as establishing sovereign wealth funds. Currently these funds hold more
than USD 4.1 trillion...
Sovereign Wealth Funds 2019 Sovereign Wealth Funds 2019
(% GDP) (% Principal energy and mineral exports)
Brunei Norway
Kuwait Brunei
Norway Saudi Arabia
United Arab Emirates United Arab Emirates
Qatar Kuwait
Libia Qatar
Saudi Arabia Libia
Azerbaijan Azerbaijan
Kazakhstan Kazakhstan
Oman Oman
Australia Australia
Argelia Russia
Russia Colombia
Peru Mexico
Colombia Canada
Canada Peru
Mexico Nigeria
Iraq Iraq
Nigeria Argelia
0,00% 100,00% 200,00% 300,00% 400,00% 500,00% 0% 1000% 2000% 3000% 4000% 5000%
18
Source: Sovereign Wealth Fund Institute. IMF.
• …The existence of a sovereign wealth fund to cope with energy and mineral
price volatility has important macroeconomic implications. Energy and
mineral exporters with large sovereign wealth funds tend to have, on
average, higher gross national saving rates...
Gross national saving (%GDP)
70 Energy and mieral exporters Energy and mineral exporters
(with large SWF) (without large SWF)
60
50
40
30
20
10
0
Australia Kuwait Norway Oman Qatar Saudi United Bolivia Canada Colombia Ecuador Mexico Peru Sudan
Arabia Arab
Emirates
30
20
10
-10
-20
Australia Kuwait Norway Oman Qatar Saudi United Bolivia Canada Colombia Ecuador Mexico Peru Sudan
Arabia Arab
Emirates
2013 2015 20
Source: IMF. SWF: Sovereign Wealth Fund. Fiscal deficit: General government net lending/borrowing (revenue – expense – net gross investment in non financial assets)
• …A downswing in energy and mineral prices causes exporters of these
commodities to be perceived as riskier. However, exporters without sufficient
hedging mechanisms are more sensitive.
Change in 5-year CDS (pbs 2014-2015)
Peru
Energy and
large SWF)
exporters
(without
mineral
Mexico
Colombia
Australia
mineral exporters
(with large SWF)
Energy and
Norway
Qatar
Saudi Arabia*
Hungary
mineral importers
Thailand
Energy and
Turkey
Poland
Brazil
22
• As a first policy implication, depending on country circumstances, a flexible
exchange rate might help to cope with commodity price volatility. In Colombia,
the floating exchange rate regime has worked well as a shock absorber. However
certain preconditions should be fulfilled…
Exchange Rate (left axis) vs Terms of Trade (right axis)
COP/USD 2000=100
3.500 250,00
3.000
200,00
2.500
150,00
2.000
1.500
100,00
1.000
50,00
500
0 0,00
Jan-00 Jan-04 Jan-08 Jan-12 Jan-16 23
Source: Banco de la República
1. Limited currency mismatches. Currency mismatches remain low and contained
in both the real and financial sector.
Debt of the Corporate Private Sector by currency and FX Net Open Position of the Financial Sector
22% (Assets minus liabilities in foreign currency) 2.800
45% hedge
% of Technical Capital
USD Million
Upper regulatory limit
(% of GDP) 1,5%
19%
3,1%
40%
2,4% 2.100
16%
35% 4,7%
30% 13%
1.400
25% 10%
20%
7%
32,4% 700
15% FX Net Open Position (% Technical
4% Capital)
10%
1%
FX Net Open Position (RHS)
5% 0
0% -2%
5%
4%
3%
2%
1%
0%
Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19
160%
120%
100%
80%
60%
40%
20%
0%
Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19
26
Source: IMF and Banco de la República. The ARA Metric is updated yearly, the reserves quarterly.
• A second policy implication is related to changes in natural interest rates
stemming from persistent shocks to terms of trade with strong effects on the
macroeconomy.
• Risk premia may shift persistently after a protracted terms of trade shock.
48%
180,0%
50%
160,0%
Peru Colombia
140,0%
40%
120,0%
100,0%
30%
21%
80,0%
60,0%
20%
66%
40,0%
20,0%
10%
0,0%
Apr-14
Oct-14
Apr-15
Oct-15
Apr-16
Oct-16
Apr-17
Oct-17
Apr-18
Oct-18
Apr-19
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Colombian CDS (% of Peruvian CDS)
Colombian ToT (% of Peruvian ToT) 27