As a net importer of energy, Asia is vulnerable to a rise in oil prices due to Russia’s invasion of Ukraine. And with more than 40% of global exports coming from this region, any sustained price hike wave will spread across the globe.
Frederick Neumann, co-head of Asian economic research at HSBC Holdings plc, said: “Most of the major energy importers are, so rising crude oil and gas prices will impact economic growth.” “But the impact of inflation is also substantial, even if the exact effect varies on individual markets. A delicate balancing act for central banks.”
Here’s a guide how oil boom Affecting Asia’s Largest Economies:
China
China, the world’s biggest oil importer, is facing sluggish demand for its exports along with corporate profits and consumer spending power – complicating Beijing’s effort to stabilize a slowing economy.
Working in China’s favor is its large domestic energy supply, close ties with Russia, and low consumer inflation. China experienced high producer price inflation last year due to rising costs of metals and coal, meaning base effects should keep a lid on PPI growth this year.
According to official figures, China imported more than $257 billion worth of oil last year.
“China’s core CPI remained weak, so China’s full-year inflation is generally moderated from this perspective,” said Wen Bin, chief researcher at China Minsheng Bank.
Still, some economists see room for monetary policy easing limited by any increase in consumer prices due to the oil boom.
Japan
A jump in oil prices raises the prospect of a pick-up in inflation in Japan, but is unlikely to prompt the Bank of Japan to back down from stimulus. This is because economic growth continues to decline drastically.
According to people familiar, oil prices are well ahead of the level the BOJ sees as pushing inflation ahead of its latest forecast. Yet normalizing monetary policy is not realistic unless inflation remains permanently above its 2% target.
“Inflation could be as low as 2%, and we could see it move towards the summer, but it is unlikely to remain stable at 2%,” said Takeshi Minami, chief economist at the Norinchukin Research Institute. “The problem is that as energy costs rise for consumers, they spend less on other things, and when that happens, it is difficult to reach 2% in a steady manner.”
India
A jump in food and crude oil prices is bound to feed into headline inflation, which has already crossed the Reserve Bank of India’s upper tolerance limit of 2%-6% target range. While the RBI has attributed the spike to supply-side shocks, higher prices will still eat away at the disposable income of consumers, the backbone of the economy that is yet to fully start spending post the pandemic.
While the central bank may have to raise its inflation forecast, there may be little room for it to tighten monetary policy amid a deteriorating global growth outlook.
“It’s a policy-makers’ nightmare — the risk of persistent inflation, with a very uneven and unsatisfactory growth,” said Anant Narayan, senior Indian analyst at the Observatory Group, an economic and political advisory firm.
South Korea
South Korea is concerned that the war will raise energy costs and hurt its bottom line in exports. The country’s manufacturing industries are heavily dependent on imports for energy and the nation only returned to a trade surplus in February after a two-month deficit due to high oil prices.
Inflation in consumer prices is also rising faster than expected, driven by energy. Even after three interest rate hikes by the Bank of Korea since August, prices last month rose 3.7% from a year earlier, well above the central bank’s target of 2%.
Nevertheless, South Korea’s relatively short economic ties with Russia have helped limit the direct impact from the war. According to the trade industry, Russia imports only 1.5% of South Korea’s exports and the Asian country’s refinery industry only 5.6% of its oil imports from Russia.
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 that it will cut fuel tax for three months.
Australia
Australia’s status as a net energy exporter means it is partially protected from oil shocks. The nation is a major exporter of liquefied natural gas, whose shipments hit a record high in 2021 due to rising energy demand and prices. Economists expect continued growth in export revenue and national income.
“Australia is in a different position because we export many commodities whose prices are rising,” Reserve Bank of Australia Governor Philip Lowe said in a speech. “This means that our terms of trade will increase in the coming months, which will boost our national income.”
As for monetary policy, Lowe said an interest rate hike later this year is “plausible” because Russia’s invasion of Ukraine creates a new supply shock that will prolong a period of high inflation.
Southeast Asia
In Indonesia, Southeast Asia’s largest economy, subsidies on basic commodities such as cooking oil, LPG, fuel and electricity have lessened the blow of a global commodity rally on consumers. February inflation stood at 2.06%, at the low end of the central bank’s 2%-4% target range, to give officials breathing room should they decide to keep interest rates at a record low next week.
However, the subsidy comes at a heavy cost to the state budget and cash flow of Indonesia’s state-owned oil firm. A sharp rise in global crude oil prices is pressing the government to consider raising administered prices for gasoline, with speculation that PT Pertamina could record a monthly loss of $500 million if it does not.
Maybank estimates that a 15%-20% increase in retail fuel prices could add 1 to 1.5 percent to Indonesia’s inflation rate, which is already being seen as the economy reopens.
Ukraine Crisis to Divide Central Bank in Southeast Asia
According to Nomura Holdings Inc., the likes of Thailand and the Philippines will likely drop as higher oil prices impact transportation and food costs.
Thailand’s inflation rose to its highest level since 2008 last month as the country grapples with rising food and energy costs. Meanwhile, Pilipinos Governor Benjamin Diacono’s Bangko Central forecast inflation could breach its target and up 4.4%-4.7% this year under the “worst-case scenario” of oil prices to $120-$140 a barrel. can reach.
The governments of both countries said they had enough tools to deal with the shock, without having to resort to premature rate hikes by central banks.
Malaysia, a net exporter of crude oil, could stand to gain through a wider trade balance. Bank Negara Malaysia kept its policy rate at a record low last week, with analysts expecting normalization to begin in the second half of the year.
The Monetary Authority of Singapore has already started tightening, a surprise move first in October and then in January. It uses its exchange rate as its policy tool, allowing appreciation against trading partners to counter rising costs for imported food and fuel.
Bloomberg Economics was already expecting further tightening in April and now thinks a double tightening – a reorientation of the central bank’s currency bands and an increase in the slope of the bands – is “highly likely.”