How the Current Slump in Resource Prices is Affecting Remittance

In recent years, the prices of commodities such as oil, gas, sugar, copper, and iron ore have been in a free fall. According to Bloomberg Business, a 46% decline in resource prices has been witnessed since 2011, and we should expect more. With the slowing down Chinese economy, the commodity prices are in for a deeper dive.

As the prices continue to slump, many exporting countries are experiencing financial distress. The decline in commodity prices is eating on their net export revenues, hence pushing them towards a recession. On the other hand, importing countries are experiencing a boom as their disposable income increases with the fall in commodity prices.

How then does the current slump in resource prices affect the exchange market? Even though there is no rule to determine the correlation between currencies and commodities, the relationship cannot be ignored. For instance, the current slump in oil prices has seen the Canadian dollar and the Russian Ruble decline in value. Other currencies affected by the fall in oil prices include the Brazilian Real, Norwegian Krone, and the Colombian Peso.

The decline shows a strong correlation between a country’s major export and the value of its currency in the foreign exchange market. In the case of Canada, as the fourth largest exporter of crude oil, a decline in oil prices is likely to result in the weakening of the Canadian dollar. The decline in revenues from oil will weaken the currency in the exchange markets.

When it comes to importing countries, a slump in resource prices can mean two things. First, the decline in commodity prices means reduced expenses and hence higher profits for companies. With the increased revenues, the importing countries will get a chance to improve their current accounts hence strengthening the value of their currency in the foreign exchange markets.

Among the greatest importers of oil, the Chinese Yuan should be blossoming in the current oil prices, but due the slowing economy, things are different. India, which imports 75% of its oil is expected to ease its current account deficits if the oil prices maintain their low.

On the other hand, a slump in commodity prices can mean deflation to importing countries. A decline in commodity prices results in a decline in related product prices, thus encouraging exports and discouraging imports. In the long run, all factors considered, this leads to the strengthening of the given currency.

As the resource prices continue to tumble, there is a likelihood of a decline in remittances from the affected economies. For instance, in the wake of the falling oil prices, the remittances from Indian citizens working in major oil producing countries has declined. The World Bank warns that if the oil prices are to remain low, the remittance flow from the Gulf Cooperation Council will decline further. Even when India is benefiting from an increase in disposable income, the decline in remittances to the country is a reason to worry.

The main reason for the decline in remittances is the weakening of a currency of the affected economy. When the prices of exports fall, the decline in revenues is likely to weaken the position of a given currency in the global foreign markets.

For instance, the weakening of Russia economy is affecting the economies of neighboring countries as a result of the declining remittances, trade and investments. The areas most affected by the slowing Russia economy include Central Asia and Caucasus. Given that most developing countries depend on remittances from developed nations, the plummeting oil prices have a negative effect on the stability of their currencies.

Even as some countries continue to enjoy the increase in disposable income as a result of the slump in resource prices, there is a reason to worry. As the commodity markets continue to plummet, there is a likelihood of a contagious financial disaster to the global economy. When coupled with other factors as the crumbling China economy, the prices are likely to go down further leading to more trouble.

As analysts continue to encourage investors that this is the best time to buy commodities, there is a reason to be more careful. Unless the Chinese markets stabilize, the commodity prices are likely to crumble further.