What happens if the black bubble pops?
Several emerging market countries have discovered that oil is a bane not a blessing, destroying domestic development. The current crop of oil champions may have stabilization funds, but Theodore Kim explains how things can still go wrong.
THE OIL BUBBLE has rewritten investors’ lists of winners and losers far beyond the confines of commodities. Emerging market sovereign debt issues that were once trading at steep discounts are now at priced well over par and yield less than most Fortune 500 corporate bonds. Thanks to the global glut of petrodollars flooding through the investment-grade fixed income markets, a brand new multi-billion dollar CDO industry has rapidly developed based on piecing together complex synthetic debt structures that claim to offer perhaps a 75 basis point yield pick-up – now seen as generous – as a result of their creative structuring.
Even sleepy little Calgary in Canada, once a backwater town known best known for hosting the 1988 Winter Olympic Games, is experiencing rocketing commercial real estate prices as it aggressively sells itself as an up-and-coming global financial capital as a result of billions of new revenues that could be extracted from nearby tar pits. With economists now formulating all their growth, consumption, savings and investment models based on $60-plus oil prices, has anyone pondered what will happen if the black bubble pops?
Economists have long observed that oil-rich countries tend to perform badly.