Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Emerging Markets Are Hedging Against a $100 Oil Shock
Transcript
- Lucas: Brent crude above $100 a barrel. That is not a hypothetical anymore — it is the market reality as of this week, and it is sending shockwaves through the emerging world. But here is the thing: a hundred-dollar oil price does not hit every developing economy the same way. Far from it. Luna: And we are already seeing the divergence in how markets are pricing that. Just look at the iShares India ETF, INDA, down two-point-six percent over the past five days, while the Indonesia ETF, EIDO, is actually up around three percent. Lucas: Right. And that is a perfect entry point. India is one of the world's largest crude importers — it buys about 85 percent of its oil from abroad. So a sustained spike in Brent directly widens its trade deficit, pressures the rupee, and forces the central bank to burn reserves. Meanwhile, Indonesia is a net oil exporter, but it is complicated. It used to be a major exporter; now it is a marginal exporter, and it still subsidises domestic fuel. Luna: So the market is basically saying: Indonesia can weather this better than India can. But is that actually true, or is there more nuance? Lucas: There is always nuance. Let me start with India, because the numbers are stark. India's trade deficit for goods and services in May 2026 hit minus 77-point-6 billion dollars — that is a deterioration of about 23 billion dollars year-over-year. And the current account deficit is now running at roughly minus 227 billion on an annualised basis. That is a lot of dollars flowing out. Luna: And that is exactly when the Reserve Bank of India has to step in and sell dollars to defend the rupee. Which drains foreign exchange reserves that took years to build up. Lucas: Exactly. And the RBI is in a tough spot because if it lets the rupee depreciate too much, that feeds imported inflation — especially oil. But if it burns reserves too quickly, it risks a credibility problem. The trade-weighted dollar index is at 120-point-five, so the dollar is strong across the board. That only adds to the pressure. Luna: Before we go deeper into India's options — and I want to get to Indonesia — I want to mention something. We keep this show ad-free on purpose. No ads, no sponsors, no interruptions. It is a deliberate choice so we can focus on the numbers and the story without pitching anything. If that approach resonates with you, and you want to support it, the link is buy me a coffee dot com slash fexingo. Really simple, no pressure. Now, back to oil and the divergence between these two economies. Lucas: Yeah, and that support genuinely helps us keep doing this. So on Indonesia — the market is pricing resilience, but there are real vulnerabilities. Indonesia is still a net oil exporter, but its production has been declining for years. It exports coal and palm oil, which also benefit from higher commodity prices. And the government has been pushing biodiesel mandates to reduce diesel imports, which acts as a natural hedge. Luna: The biodiesel mandate is basically forcing palm oil into the fuel mix. That supports domestic palm oil prices, reduces crude imports, and helps the current account. It is a clever policy, but it also creates a floor under palm oil prices, which can hurt consumers. Lucas: Right, and there is a trade-off. The subsidy bill for fuel in Indonesia is going to rise if crude stays above $100. The government has been trying to reform subsidies for years, but politically it is very sensitive. So higher oil prices put pressure on the fiscal deficit. That is the risk the market may be under-pricing. Luna: So India is getting hit on both the external and fiscal fronts, while Indonesia has a partial buffer but still faces fiscal strain. What about other big emerging markets? Brazil is a major oil producer — the EWZ ETF is actually up two-point-six percent over the past five days. Lucas: Brazil is a clear winner on the trade side. Petrobras benefits directly, and the real has been relatively stable. However, Brazil also has domestic fuel subsidies and a history of government intervention in Petrobras pricing. So the market is pricing in the commodity upside, but there is always political risk. Luna: And what about the broader EM bond space? Higher oil tends to mean higher inflation globally, which could push the Fed to hike rates. That would strengthen the dollar further and make dollar-denominated debt more expensive for all emerging markets. Lucas: That is the macro layer that matters most. The odds of a Fed rate hike have surged this week — you saw those headlines. If the Fed tightens, it is a headwind for all EM currencies and bonds. But the differentiation will come from which countries have credible central banks and which do not. India's RBI has a decent track record; Turkey's central bank, not so much. Luna: So the takeaway is that $100 oil is not a uniform shock. It is a test of each country's external balance, fiscal flexibility, and policy credibility. India passes on some dimensions but fails on the trade deficit. Indonesia passes on the trade account but struggles with subsidies. Brazil looks good but politics loom. Lucas: And the market is already voting with its feet. India ETF down two and a half percent this week, Indonesia up three, Brazil up two and a half. That is the market's best guess at who is hedged and who is exposed. But as we know, those bets can reverse quickly if oil goes to $110 or if the Fed does something unexpected. Luna: So watch the trade data and the central bank statements out of India and Indonesia over the next few weeks. That will tell us whether the market is right or wrong. Lucas: Exactly. And on that note, we will be watching. For Fexingo Business, I am Lucas. Luna: And I am Luna. Thanks for listening.