Energy self-sufficiency will improve the emerging countries' energy balances but will not solve their current account deficits and external debt problems without other structural reforms.
The world is facing a global energy crisis of unprecedented depth and complexity that has accelerated a transition to renewable energy sources. How will these profound changes affect emerging markets? According to the latest report released by Crédito y Caución, in the medium term, the energy transition should bring relief to the finances of energy-importing emerging markets in two ways. On the one hand, the downward pressure this will put on oil and gas prices could help reduce their import bills. On the other hand, their own investments in renewables production will allow them to gain energy self-sufficiency and gradually replace imported fossil fuels.
According to the report, this process towards self-sufficiency is already underway: the fossil fuel import bill has been reduced on average from 8.4% of GDP in 2015 to 6.2% in 2021 among the 50 most energy-dependent emerging markets. Jordan and Morocco are two particularly successful examples: they have increased the share of renewables in their mix to 34% and 37%, respectively.
This path towards energy self-sufficiency in emerging markets will reduce imbalances in their current account balances, which is expected to reduce their country risk and offer opportunities for investment and growth. However, the report stresses that it will not fully eliminate the persistent twin current account and budget deficits, nor solve the external debt problems these countries face. Dependence on imports of commodities such as food and increased demand for capital goods associated with ongoing transformation, such as solar panels and wind turbines, will continue to drive these deficits.
Public debt in many countries will continue to exceed the critical 70% threshold for emerging economies within a decade. Therefore, in parallel to energy self-sufficiency, broad structural reforms will be equally important to reduce the entrenched financial vulnerabilities and macroeconomic imbalances of emerging economies, in a context where the decline of fossil fuels will follow a volatile trajectory.
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Source: CyC, Atradius