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Could rising commodity prices and geopolitical concerns exacerbate inflationary challenges for the economies of the Association of Southeast Asian Nations (ASEAN)? We spoke with DBS Group Research’s Han Teng Chua, Economist, and Radhika Rao, Senior Economist, about the region’s inflation pressures and outlook for the year.
AsiaFundManagers.com: Inflationary concerns are starting to rise across ASEAN. What are the primary factors fueling these fears?
Inflation is starting to heat up in ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand, Vietnam), even as headline figures have not deviated far from targets, except in Thailand. In our recent report ‘ASEAN-5: Evaluating key inflation drivers’, we segregated each of the economies’ headline consumer price inflation (CPI) into their key drivers – global, regional, and domestic, using a Principal Component Analysis approach. Our analysis showed us that the ongoing rise in international fuel and food prices were the dominant drivers for headline inflation across the board.
Inflation momentum in ASEAN-5 also is substantially lower than in the US, EU, or Singapore, likely on two counts. First, ASEAN-5 received a smaller fiscal boost during the Covid-19 pandemic relative to the US or the EU. Second, the pandemic has resulted in medium-term labour market scarring for most ASEAN-5 economies, with jobless rates yet to return to pre-pandemic levels. The recovery is still nascent, with output gaps mostly negative, which are reflected in the domestic factor in our inflation decomposition exercise. Despite upside inflationary pressures, central banks in the region are opting to stay patient and keep policy accommodative to support a durable growth upturn.
AsiaFundManagers.com: Which ASEAN countries are likely to take the biggest hit from rising inflation, which the least?
Out of the ASEAN-5 economies that we analysed in our aforementioned report, inflation pressure is the most apparent in Thailand and is contained in Indonesia, Malaysia, and Vietnam. Thailand’s headline CPI has already breached the upper end of the central bank’s inflation target of 1-3%, registering at a multi-year high of 5.3% YoY in February, primarily driven by higher commodity prices, notably oil. Thailand is heavily reliant on oil imports and runs a sizeable oil trade deficit compared to regional peers. Consumers’ living costs are being driven up, undercutting real incomes, at a time when the economy has yet to return to its pre-pandemic level, due to a decimated tourism sector that has only just begun its nascent revival. The government is attempting to alleviate rising oil prices through subsidies that are funded via the state oil fund by extending the THB30/litre cap for diesel prices until May. The cabinet has also removed the borrowing cap of its state oil fund, and scrapped restrictions that include cutting and halting subsidies when the fund runs into losses.
Indonesia and Malaysia are yet to face price pressures akin to Thailand. In Indonesia, inflation is still well within the central bank’s target range of 2-4%, while Malaysia’s numbers are only slightly above its long-term average of 2.0%. Price controls and subsidies have limited the spillover of rising global energy prices on domestic inflation, with the fiscal accounts bearing the burden. Vietnam’s headline inflation was also well below the central bank’s inflation target of 4.0% at below 2% YoY in February, but mainly due to domestic weakness as the economy suffered heavily from the virus lockdowns in 2021. Recovering inflation would likely reflect a turnaround in demand, which is positive for the economy, even though supply-driven increase in global commodity prices is also likely to feed to higher price pressures.
AsiaFundManagers.com: What impact does the Russia-Ukraine war have on ASEAN economies? Is the recovery path at risk?
Total trade between Russia-Ukraine and the ASEAN-6 countries (ASEAN-5 including Singapore) is not high, constituting less than 2% for most countries. There are pockets of product concentration in the import basket, including supplies of wheat (25% of Indonesia’s purchases come from Ukraine), corn, and inputs for the fertiliser industry.
The bigger impact is via the indirect channel of higher commodity prices, especially oil. In this bloc, Thailand is the largest net oil importer, while Malaysia and Indonesia benefit from the concurrent rally in other commodity groups, including minerals, metals, and palm oil. Hence, whilst higher commodities translate into improving terms of trade, inflation is the collateral risk. Countries with high fuel weightage in their inflation baskets and those that allow for complete pass through to domestic pump prices face rising inflationary risks.
Elevated inflation comes at a time when demand is still to fully normalise, thereby impinging on real incomes and purchasing power. Persistently elevated oil, which could translate into rise in other segments including food, utilities, transport etc. are a risk to ASEAN-6’s recovery, but with governments likely to step in to smoothen the impact, we do not expect growth in this region to be derailed due to geopolitical risks.
AsiaFundManagers.com: Many countries are easing Covid-restrictions. How is the situation in ASEAN, is Covid still a big threat to the economies?
Encouragingly, the Omicron variant is less virulent than the previous variants, even though caseloads touched record highs in the most recent wave. Armed with rising vaccination rate, natural immunity, and low hospital occupancy, most countries in the region are seeking to ‘live with the virus’ and have not only opted to unwind local restrictions, but also open borders to resume international travel and kickstart the crucial tourism sector via dedicated vaccine travel lanes, removal of quarantine requirements, allowing short-term visitors, amongst others. While the pandemic is a wildcard, domestic retail and recreation mobility indicators across the ASEAN region are close to their pre-pandemic levels.
AsiaFundManagers.com: Thank you very much for the interview.
Radhika Rao
Radhika Rao is Executive Director and Economist for Eurozone, India, Indonesia region at DBS Economics and Macro Strategy. She is based out of Singapore.
Han Teng Chua
Han Teng Chua is a CFA and Economist at DBS Group Research. He is based out of Singapore.
