As a net importer of energy, Asia is vulnerable to the spike in oil prices triggered by Russia’s invasion of Ukraine. And with more than 40% of global exports coming from the region, any sustained price increases will reverberate around the world.
“Most are huge energy importers, so soaring crude and gas prices will weigh on economic growth,” said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc. “But the impact on inflation is also significant, although the precise impact on individual markets varies. A delicate balancing act for central banks.
Here’s a guide to the impact of the oil boom on Asia’s largest economies:
China, the world’s largest oil importer, faces a squeeze in corporate profits and consumer purchasing power, as well as slowing demand for its exports, complicating Beijing’s efforts to stabilize a slowing economy.
Working in China’s favor is its large domestic energy supply, its close ties to Russia and low consumer inflation. China experienced high producer price inflation last year due to soaring metal and coal costs, which means that base effects should limit PPI growth this year.
China imported more than $257 billion worth of oil last year, according to official statistics.
“China’s core CPI remained subdued, so China’s full-year inflation is generally controllable from this perspective,” said Wen Bin, chief researcher at China Minsheng Bank.
Still, some economists see scope for monetary policy easing constrained by any escalation in consumer prices from the oil boom.
Soaring oil prices increase the likelihood of inflation accelerating in Japan, but are unlikely to induce the Bank of Japan to back off on stimulus. This is because economic growth continues to disappoint.
Oil prices are well above levels the BOJ sees as pushing inflation past its latest forecast, according to people familiar. However, the normalization of monetary policy is not realistic until inflation remains above its 2% target for a long time.
“Inflation might hit 2% briefly, and we might see it pick up further towards the summer, but it’s unlikely to stay at 2% on a stable basis,” said Takeshi Minami, chief economist at Norinchukin Research. Institute. “The problem is that as energy costs for consumers go up, they spend less on other things, and when that happens it’s hard to hit 2% on a stable basis.”
Soaring edible and crude oil prices are sure to fuel headline inflation, which has already breached the upper tolerance limit of the Reserve Bank of India’s 2-6% target range. While the RBI blamed supply-side shocks for the surge, rising prices will nonetheless eat away at consumers’ disposable incomes, the backbone of the economy which has yet to start spending fully after the crisis. pandemic.
Although the central bank may need to raise its inflation forecast, it may have little room to tighten monetary policy amid a deteriorating global growth outlook.
“It’s a policymaker’s nightmare – risk of persistent inflation, alongside very uneven and unsatisfactory growth,” said Ananth Narayan, senior India analyst at Observatory Group, an economic and policy consultancy.
South Korea fears that energy costs will rise due to the war and hurt its exports. The country’s manufacturing industries are heavily dependent on imports for energy and the country just returned to a trade surplus in February after a two-month deficit caused by high oil prices.
Consumer price inflation is also accelerating faster than expected, driven by energy. Prices rose 3.7% last month from a year earlier, well above the central bank’s 2% target, even after three interest rate hikes by the Bank of Korea since August.
Yet South Korea’s relatively weak economic ties with Russia helped limit the direct impact of the war. Russia accounts for just 1.5% of South Korea’s exports and the Asian country’s refining industry imports just 5.6% of its oil from Russia, according to the trade industry.
Meanwhile, South Korea decided last week to release 4.4 million barrels of oil from its emergency reserves as part of an agreement between members of the International Energy Agency to help stabilize prices. The government also said it would extend fuel tax cuts for three months.
Australia’s position as a net energy exporter means it is partly insulated from the oil shock. The country is a major exporter of liquefied natural gas, with shipments hitting a record high in 2021 due to a spike in energy demand and prices. The trade surplus widened to A$12.9 billion in January, the biggest windfall since August. Economists expect a continued increase in export earnings and national income.
“Australia is in a different position because we export a lot of commodities that are going up in price,” Reserve Bank of Australia Governor Philip Lowe said in a speech. “This means that our terms of trade will increase over the coming months, which will boost our national income.”
On monetary policy, Lowe said an interest rate hike later this year is “plausible” as Russia’s invasion of Ukraine creates a new supply shock that will extend a period high inflation.
South East Asia
In Indonesia, Southeast Asia’s largest economy, subsidies on commodities like cooking oil, LPG, fuel and electricity have cushioned the blow of the global commodity boom on consumers. Inflation in February came in at 2.06%, at the lower end of the central bank’s target range of 2% to 4%, giving authorities some breathing room if they decided to keep interest rates on hold. interest at historic lows next week.
However, the subsidies have a high cost for the state budget and the cash flow of the Indonesian state oil company. The sharp rise in global crude prices is pressuring the government to consider raising administered gasoline prices, estimating that PT Pertamina could face losses of $500 million a month if not the case.
Maybank predicts that a 15-20% increase in retail fuel prices could add up to 1-1.5 percentage points to Indonesia’s inflation rate, which is already accelerating as the economy reopens further.
The Ukraine crisis will stimulate the division of central banks in Southeast Asia
According to Nomura Holdings Inc., countries like Thailand and the Philippines are likely to take a hit as rising oil prices impact transportation and food costs.
Inflation in Thailand hit its highest level since 2008 last month as the country grappled with rising food and energy prices. Meanwhile, Bangko Sentral ng Pilipinas Governor Benjamin Diokno estimates that inflation could exceed its target and reach 4.4% to 4.7% in the “worst case” of oil prices reaching 120 to $140 a barrel this year.
The governments of both countries have said they have many tools to manage shocks, without central banks having to resort to premature rate hikes.
Malaysia, a net exporter of crude oil, could benefit from a widening trade balance. Bank Negara Malaysia kept its key rate at a record high last week as analysts expected normalization to begin in the second half of the year.
The Monetary Authority of Singapore has already started to tighten, first in October and then again in a surprise move in January. It uses its exchange rate as a political tool, allowing appreciation against its trading partners to counter soaring prices for imported food and fuel.
Bloomberg Economics was already expecting further tightening in April and now thinks a double tightening – a refocusing of the central bank’s monetary band and an increase in the slope of the band – is “very likely”.