Author: Juthathip Jongwanich, Thammasat University
Russia’s unprecedented invasion of Ukraine is threatening Southeast Asia’s post-COVID economic recovery. Although these countries have few direct economic links to Russia or Ukraine, the conflict is causing various commodity prices — especially oil, nickel, wheat and corn — to surge. This is particularly concerning for Thailand, Vietnam and Singapore as net importers of these commodities.
West Texas Intermediate crude and Brent crude oil prices have almost doubled compared to the same time last year, while the Thomson Reuters/Core Commodity index has soared 33 per cent since the beginning of 2022. The impacts of commodity price hikes are filtering down to domestic prices, affecting both producers and consumers in the region.
Producer and consumer price inflation in Thailand, for example, increased to 11.44 per cent and 5.73 per cent year-over-year in March, up from 8.7 per cent and 3.23 per cent respectively in January. Although the effect has not yet been evident in overall consumer prices inflation in Vietnam, Malaysia and Indonesia, as their inflation is still around 2.2–2.6 per cent, the impact of rising oil costs is being felt in subgroups of consumer prices, such as transport, housing, electricity, gas and other fuels. In Vietnam, the petrol shortage is leaving some stations without any petrol to sell, and it is alleged that enterprises are hoarding petrol as they wait for price escalations.
The commodity price hikes have had different effects across the region. This is unsurprising as various factors, including the pace of their post-COVID economic rebound and different pace of demand recovery, influence flow-on effects. Government intervention, such as energy subsidies, could help ease the impacts of soaring oil prices on inflation, especially in Indonesia. According to Fossil Fuel Subsidies Database – IEA, fuel subsidies in Indonesia accounted for around 0.6 per cent of GDP in 2020, compared to 0.1 per cent in Thailand and Vietnam in the same year.
In Indonesia, Malaysia and the Philippines, oil and energy consumption is relatively low, which could help curb the impacts of the oil price hike on inflation. In Singapore and Thailand relatively high petrol and energy consumption will likely result in the oil price hike impacting domestic prices faster.
Regarding food prices, Indonesia, Malaysia, the Philippines and Vietnam will probably suffer more than others, as per capita consumption of staple foods like wheat is relatively high. Still, price controls and direct subsidies for households will help soften the impact of food price hikes and limit the ability of firms to transfer these higher costs on to consumers.
Commodity prices are expected to remain high amid economic sanctions imposed on Russia and slow progress regarding a ceasefire in Ukraine. With consumer demand still recovering from COVID and prolonged rises in commodity prices, fears of ‘stagflation’ in the region have been revived. While the pandemic has halted efforts to reduce poverty and increased inequality, further deterioration in purchasing power among low and middle-income citizens raises concerns about achieving a smooth and sustained recovery in the region.
In the short run, government support systems designed to protect low-income earners are necessary to ensure a smooth and sustained recovery. This support should include food price controls, fuel subsidies and caps on ex-refinery and retail prices.
Indonesia and Malaysia, as net oil exporters, are in a better position than others as oil price hikes will help mitigate pandemic-related government debts to some extent. For other Southeast Asian countries, concrete plans to build solid revenues should be implemented after they show stronger signs of economic recovery to address fears about public-debt distress. Singapore, for example, plans to increase GST, with a rebate scheme for low-income earners, from 2023 — and extend it to more products, including imported low-value goods and online sales of low-value goods by overseas suppliers.
Central banks should be cautious about tightening monetary policy, especially in Thailand, where signs of growth recovery are weaker than elsewhere in the region, and supply shocks still heavily influence prices and inflation expectations. Exchange rates should be closely monitored to avoid unreasonable import price rises and support exports, which have been the key engine of economic recovery in the region so far. Further trade and investment liberalisation could, to a certain extent, help ease import burdens and eventually improve firms’ export competency in the region.
Governments of Southeast Asian nations, especially oil importing countries, may try to secure alternative oil suppliers such as Venezuela and Saudi Arabia, but should be careful in responding to possible redirecting Russia’s energy exports towards Asia. They may also provide support via ASEAN for pushing OPEC and IEA member countries to increase supply to alleviate pressures on prices. Cooperating with multiple sectors to improve energy efficiency could also help curb soaring domestic prices. Diversifying energy supplies, especially encouraging greener energy, would also be a more sustainable way of tackling volatile oil prices in the future.
Juthathip Jongwanich is Associate Professor at the Faculty of Economics and the International Competitiveness Research Cluster, Thammasat University.
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