The warning came in a research note from Manolis Davradakis, senior emerging economist in the research & investment strategy department at Axa Investment Managers.
“International commodity prices have been falling at double-digit rates since mid-2014, with long lasting consequences for EM commodity exporters’ growth,” Davradakis wrote.
Energy prices fell by 58% from June 2014-November 2015, metals by 33% and food by 25%, according to the IMF’s index of prime commodity prices.
“EM commodity exporters have not managed to diversify their economies and have spent the windfall from the 2000-2008 commodity boom, while high inflation is undermining social stability.
“To maintain social stability, several EM commodity exporters have introduced a welfare state that includes generous social aid programmes, housing and subsidised energy consumption. Scrapping these programmes because of fiscal consolidation would accelerate already high inflation and disrupt social stability.”
Risks to social stability are most pronounced in Latin America and Russia, he wrote.
Indonesia, Kazakhstan, Malaysia and Russia are singled out for a “precarious growth outlook” because they rely on multiple commodities for export such as agricultural goods, metals and oil.
Oil prices in particular are impacting on the Middle East. In Saudi Arabia, the drop in reserves to $654bn in the second quarter of 2015 from $732bn in 2014 has “alarmed the authorities”, the report said.
The cost of insuring Saudi debt is now on the same level as junk-rated Portugal, according to a recent Bloomberg report.
Investment grade ratings could also fall for Russia and South Africa, which have high public debt and political uncertainty. According to Davradakis, the sovereign ratings for these countries could drop by at least two notches if oil prices continue falling.
Had the commodity exporting economies diversified into other industries during the eight-year commodities boom, they could today withstand falling prices and sustain economic growth, he said.
The firm recommends avoiding investment in commodity exporters, “particularly those that are already highly leveraged and are running low on buffers”.
