Bruce Kasman, Managing Director and the Chief Economist for J.P. Morgan (Photo provided by J.P. Morgan)

In formulating a 2016 outlook for commodity exporters, the commodity super cycle and emerging market (EM) credit super cycle need to be linked. It is now well recognized that the 157% increase in commodity prices from 2000-12 is set to be followed by a prolonged period of weakness. It is less well understood that the consequences of the commodity price surge was an unsustainable private sector credit boom. The unwinding of this boom is likely to be the most significant factor holding down EM commodity exporter growth next year. Importantly, it also poses risks of a financial markets crisis in economies that deleverage while being forced to tighten policy.

Behind the run-up in commodity prices over the past decade stands an EM growth boom fueled by China, which grew at a remarkable 10.5% annual rate from 2002-12. There were positive fundamental changes taking place across a wide range of EM economies, but commodity producers benefited in particular, as China's surging commodity demand generated significant terms-of-trade improvements. The later phase of this upturn created a dramatic shift in global financial conditions as a housing crisis emanating in the US and a dramatic monetary easing by the Federal Reserve prompted a significant capital flow into EM. The upshot of these developments was an unprecedented surge in EM private sector credit. From 2007-2013, private sector credit as a share of GDP rose 39%-pts. While China was a significant driver of EM growth over this period, commodity producers were also key participants in the boom. Private sector credit grew at an average 20% annual rate in commodity-producing nations during this period.

Weaker trend growth in China and the likely persistence of weak commodity prices point to the need for structural reforms in commodity-producing economies to adjust to a new reality. However, the central challenge for commodity exporters for 2016-17 will be to manage the unwinding of the excesses created during the boom years. With corporate profitability depressed and growth weak, the pressure from rising non-performing loans and a tightening in credit standards is building. We believe that the main risk to global growth next year is that these adjustments turn disruptive in some key commodity exporting nations.

Ideally, policymakers should be cushioning the weakness in domestic demand with easier monetary and fiscal policy. Unfortunately, the stance of policy is being pushed in the opposite direction. In part, this reflects pressures related to macro imbalances in commodity-producing countries, where inflation is elevated and current accounts have moved into deficit. With inflation rates in the three largest commodity exporters -- Brazil, Russia and Indonesia -- standing well above central bank targets, policy rates have moved higher over the past year. At the same time, the shadow of the US Federal Reserve looms large. We expect the Fed to raise policy rates by 125bp cumulatively through the end of 2016. If this development is realized, any needed easing will be further constrained and EM central banks will likely face pressure to tighten in response.

There are reasons for optimism that many commodity exporters will avoid sliding into crisis. During the boom times, most countries paid careful attention to building up foreign exchange reserves and ensuring that fiscal positions were sound. Such safeguards make the risk of a traditional EM crisis driven by currency declines or a sovereign default look small. Also encouraging, the US and Western European expansions have found their footing, providing an alternative source of demand for EM exports. However, there are new risks building from domestic political instability -- a point highlighted by recent developments in Brazil and South Africa. In all, the path ahead for commodity exporters will likely remain painful and will be dominated by the risks associated with unwinding the excesses created by the previous boom.

(The writer is a Managing Director and the Chief Economist for J.P. Morgan. He serves as Global Head of Economic Research, where he is responsible for leading a team of thirty economists worldwide that set the firm’s economic and policy views. )