How will the Ukraine crisis affect Asian economies?

Asian stock markets rebounded on Friday after seeing a sharp fall the previous day when Russian President Vladimir Putin launched a military invasion of Ukraine. Even as uncertainty continues over how this crisis will unfold, crude oil prices crossed $100 a barrel.

Analysts at Nomura in a recent report said that a sustained rise in oil and food prices would have adverse impacts on Asia’s economies, but with varying effects.

Global food prices have surged as the Russia-Ukraine conflict threatens to disrupt the supply of wheat and corn. The two countries account for 29% of global wheat exports and 19% of corn exports.

They also contribute 80% of the world’s sunflower oil exports. The impact on Asia in the form of higher inflation, weaker current account and fiscal balances, and a squeeze on economic growth will be felt mostly through commodities, especially food and fuel.

India, Thailand and Philippines stand to lose the most, while Indonesia would be a relative beneficiary, Nomura says. The negative impact on Asia is predominantly because most economies are net oil importers, and food and energy accounts for nearly half of the consumption expenditure in Emerging Market Asia.

Every 10% rise in oil prices will drag down India’s GDP growth by 0.2 percentage points, while Philippines and Thailand will see a hit of 0.1 percentage points.

There is also a risk to corporate profit margins, as the entire input cost burden is unlikely to be passed on to consumers.

The Indian rupee and the Philippine peso are likely to depreciate the most with wider trade deficits. In India, Nomura expects higher oil prices to increase the risk that retail inflation breaches the upper bound of the RBI’s 2-6% range, weigh on fiscal finances if excise duties are cut again, weaken consumption demand and push the basic balance of payments deeper into deficit.

In Thailand, CPI inflation is highly sensitive to oil prices. The cost of living crisis risks weakening consumption.

A slow recovery in tourism adds more downside risks to Current Account Deficit.

The Philippines is one of the most vulnerable economies to higher energy and food prices. Nomura sees risks of a much wider current account deficit in that country, due to its high oil import dependence and immediate pass through to consumers. And also due to the absence of subsidies.

However, Indonesia will be an outlier. Even though it is a net oil importer, it benefits from rising prices of palm oil, LNG and coal. The impact of higher oil prices would likely be fully offset by surging prices of non-oil commodities, resulting in a net neutral impact on the Current Account Deficit.

According to Nomura analysts, most Asian consumers have not yet fully recovered from the pandemic and have lower savings. Therefore, higher inflation can squeeze real disposable incomes and weaken the incipient consumption recovery and the impact could fall disproportionately on lower income households.

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