Those impacts in Asia from Russia’s Ukraine invasion will be felt mostly through commodities, specifically fuel and food, analysts including Sonal Varma and Ting Lu wrote in a report Friday, adding that other factors outside the conflict will also keep prices sustained.
A 10% rise in oil prices could add 0.4 percentage points to inflation in India and the Philippines, and 0.3 percentage points in Thailand, as transportation and utility costs surge, the analysts wrote. Heavy reliance on oil imports also mean their current account deficits could widen further and undermine their currencies.
India is expected to suffer the biggest blow to economic growth, dragging it down by 0.2 percentage points, while Philippines and Thailand will see a hit of 0.1 percentage points. Commodities giant Indonesia would be a relative beneficiary, with a 0.05 percentage point growth boost due to its exports of palm oil, gas and coal.
“Most Asian consumers have not yet fully recovered from the pandemic and have lower savings, so higher inflation can squeeze real disposable incomes and weaken the incipient consumption recovery,” Nomura said. “We also see risk to corporate profit margins, as the entire input cost burden is unlikely to be passed on to consumers.”
While escalating Russia-Ukraine tensions have pushed Brent oil about $100 a barrel, it would be a “mistake” to ignore other factors that could drive a more sustained increase in prices, such as a rebound of travel demand and inadequate investment in fossil fuels, according to the report. This has knock-on effects on food prices due to costlier gas, fertilizer and feedstock, which bodes poorly for Asian economies in aggregate.
Nomura expects central banks in developed Asia to tighten policies to nip the threat to their recovering economies. Others will likely prioritize still-weak growth, with Indonesia and the Philippines seen hiking rates only later this year while Thailand stays on hold.
India, which has reiterated its dovish signals, could see inflation “surprise decisively” at 5.8% in 2023 against the central bank’s 4.5% forecast, Nomura said. This could force a pivot in June and 100 basis points of cumulative repo rate hikes in 2022.
