(Opinion of Bloomberg) — The global oil market sell-off may give Asian policymakers a sense of relief: So it’s not 1973.
At the time, prices nearly quadrupled in three months and then continued to rise. This time, Brent crude rose to around $128 a barrel, but fell just as dramatically. Speculative bets on a new wave are declining as prices hover around $100 a barrel. Still, policymakers and investors should not be too complacent. Even if the benchmark doesn’t hit the $200 mark that commodity trader Pierre Andurand envisions possible this year, oil could be a powerful tool of stagflation.
For starters, as economists from Australia & New Zealand Banking Group Ltd. To note, government budgets in Southeast Asia and India have projected an average oil price of between $65 and $75 a barrel for the year, well below where the market is now. Malaysia and Indonesia, which are net energy exporters, will find it relatively easier to subsidize pump prices. However, net importers may struggle to be so generous, as they may need to cut back on development spending.
It makes sense to protect household consumption as domestic demand is still not at pre-pandemic levels. It is particularly weak in tourism-dependent Thailand. But then the virus has also pushed up the national debt: consumers cannot be spared completely. At their recent highs, a $40 a barrel rise in crude oil prices would have boosted inflation for the local economy, from 1.75 percentage points in Thailand to about 1.25 percentage points in the Philippines and India, according to ANZ.
Slightly lower global energy prices, however, need not necessarily allay inflationary pressures. The reason is China.
Traders are concerned about global oil demand over the recent ommicron outbreak in the People’s Republic. But the lockdown in the cities of Shenzhen and Dongguan in Guangdong province, which account for a quarter of the country’s outbound trade, could also lead to a wider supply-side hitch. For Asia, which relies heavily on China-made parts and components, “any prolonged or wider lockdowns in China would cause even more headaches, potentially resulting in a reduced production pipeline for factories elsewhere,” says a report by Oversea-Chinese Banking. Corp from Singapore. So, instead of curbing the inflation threat, $100 oil could end up exacerbating it anyway.
But again, oil isn’t the only commodity to worry about; food also carries a high weight in the inflation equation of Asia. Russia and Ukraine together account for 15% of global exports of wheat, maize, fertilizer and seed oil. The longer the war lasts, the greater the risk of a squeeze. While a food exporter like Thailand could benefit from higher prices, trade deficits across the region could widen due to the combined shock of energy and agricultural commodities.
India appears particularly vulnerable to what analyst Ananth Narayan of the Observatory Group calls the “policymaker’s nightmare.” If current trends continue, the current account deficit for the fiscal year starting in April could exceed 3% of GDP, he says, adding that the Reserve Bank of India may have to sell a record amount of foreign exchange. to keep the rupee stable.
The saving grace is that at 22% of gross domestic product, India’s foreign exchange war chest is robust. Still, “consumer price inflation could exceed 6% and India’s already weak fiscal balance, growth and job creation could be further hit,” Narayan said.
At the same time, oil could impact Asia’s growth prospects by reducing demand for the region’s exports. “History suggests that higher oil prices and the accompanying rise in transport costs do not bode well for trade flows,” write ANZ economists Sanjay Mathur and Krystal Tan. “A slowdown in global growth will also hurt Indonesia and Malaysia’s non-energy exports.” The Paris-based Organization for Economic Co-operation and Development expects the war in Ukraine to decrease 1 percentage point from global growth this year, but as it also expects inflation to rise by 2.5 percentage points, the OECD advises central banks to to focus on fighting price pressures.
In Asia, such clear institutional boundaries – governments that enabled growth, monetary authorities that tackle inflation – faded with the onset of the pandemic; the task of restoring them will now probably be postponed until after the end of the war. That means central banks will prioritize output by keeping interest rates low, while governments try to control inflation with energy subsidies. The results could get messy for investors, especially with the US Federal Reserve’s monetary tightening campaign already underway.
The stagflation of the 1970s in the West coincided with the rise of Asia. As the oil shock worsened their terms of trade, South Korea and Thailand increased exports to overcome their handicap. Indonesia benefited from higher raw material prices. Investments skyrocketed. Tiny Sri Lanka saw an 18 percentage point jump in the ratio of capital formation to GDP between 1977 and 1982. The circumstances are very different now, partly because of the scars of the pandemic. The Thai bond market is getting no love from global investors as Sri Lanka seeks rescue from the International Monetary Fund. Brent oil, which remained at $128 a barrel, would have dealt a major blow to Asia, but even $100 oil won’t bring it much cheer.
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Andy Mukherjee is a Bloomberg Opinion columnist on industrial companies and financial services. Previously, he was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.
This post Oil isn’t at $200. But it’s pricey enough for Asia
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