Kuala Lumpur: For economies that are not entangled with a major issue, namely Australia, China, Japan, Malaysia, and Taiwan, the Russia-Ukraine turmoil could lead to a more accommodative monetary policy path, said S&P Global Ratings.
Louis Kuijs, Asia-Pacific chief economist at S&P Global Ratings said the Russia-Ukraine conflict is likely to lead to higher energy prices and headline inflation, lower growth and, possibly, lower core inflation.
However, he said the effect on currencies, bond markets, and monetary policy could differ across Asia-Pacific, depending on trade structures, existing macroeconomic conditions, and market reaction.
“Most regional economies send less than 1.0 per cent of exports to Russia. The share is the highest for China, at almost 2.0 per cent.
“The hit from the conflict would mostly come from global market turbulence and higher prices of commodities,” he said when commenting on a report published by the credit ratings agency on the impact of the Russia-Ukraine conflict on economies and companies in Asia Pacific.
The Russia-Ukraine armed conflict and the sanctions and geopolitical friction it brings has posed headwinds to S&P Global Ratings current baseline forecasts for Asia-Pacific, underscored by recent cuts to most countries’ gross domestic product (GDP) forecasts.
Meanwhile, Kuijs said the hit on producer prices should come faster and harder than for consumer prices, especially compared with ‘core’ consumer prices (excluding energy and food). This will likely squeeze the margins of downstream firms.
Higher consumer price index (CPI) inflation would strain monetary policy in India, Korea, the Philippines, Singapore, and New Zealand, where CPI inflation is preoccupying central banks, while higher energy prices could trigger a terms-of-trade shock for net energy importers in the region.
“This would hit current account balances and real domestic consumption and investment.
“On this front, higher energy prices would be a plus for Asia-Pacific’s net energy exporters and hit the biggest importers,” said Kuijs.
He said substantially higher energy prices and volatility will likely strain the currencies and asset markets of many Asia-Pacific countries.
This pressure will be strongest where higher energy prices pressure inflation targets, such as India, the Philippines, Korea, and Thailand. Alternatively, it could cause sizable current account deficits in India, the Philippines, and Thailand.
These risks emerge as the US Federal Reserve leads several major central banks to raise policy interest rates. Traders would likely react unfavorably to large current account deficits in emerging markets.
Obvious examples are India and the Philippines. Contagion effects could also strain the asset markets of countries such as Indonesia and Korea, which have historically also been vulnerable to capital outflow during bouts of global risk aversion.
“Such price and financial market squeezes would reduce growth across the region, with further hits coming from dampened consumer and business confidence. External demand would also weaken.
“We expect this will be most apparent in demand from Eastern Europe, the Middle East, and Africa, where the economic effects of the Russia-Ukraine conflict are likely to be the largest,” he said.
He noted that slower growth would lead to lower demand-driven inflation, especially core inflation. Many regional central banks do not have much leeway to ease monetary policy to support growth, due to their concerns about inflation or capital flight.
