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Thailand: The commodity price challenge
Credit buffers built up in Asia Pacific countries to withstand risks such as high commodity prices are generally strong, but have been eroded during the Covid-19 pandemic. The impact of energy-market turmoil following the Russian invasion of Ukraine differs significantly for each sovereign debt issuer, but on the whole it is likely to be a headwind for the region.
Risks are most pronounced in frontier markets, such as Sri Lanka and Pakistan, which already face challenging external and fiscal conditions.
Most Asia Pacific countries are net energy importers, except Mongolia, Australia and Malaysia, implying downside external risks. Relatively strong external positions, with current account surpluses or modest deficits — in part from weak economic activity — provide a buffer for much of the region.
The economic recoveries in most Asia Pacific countries were set to firm up in 2022, but commodity prices are a growing risk, in light of reduced global demand faced by the region’s more export-oriented economies and most countries’ positions as net energy importers.
Rising commodity prices will push up inflation across the region, yet Asia Pacific has generally been more subdued than in much of the rest of the world. Monetary policy tightening may be brought forward, especially if commodity-price moves were to speed up tightening by the US Federal Reserve, but we generally expect tightening in Asia Pacific to be relatively more gradual compared with elsewhere.
The extent of inflation pass-through from commodity prices depends in part on the extent to which policymakers subsidise higher prices. In this regard, Pakistan stands out with fossil-fuel subsidies amounting to a region-leading 3.5% of gross domestic product. Subsidies in Malaysia and Indonesia are close to 2.5% of GDP, compared with less than 0.3% in Thailand.
Rising subsidies will add to post-pandemic fiscal consolidation risks, in the context of fiscal deficits and debt which are already high in many countries in the region.
The current tensions arising from the Ukraine crisis have contributed to a rise in global risk aversion. This could make financing conditions in Asia Pacific more challenging, particularly in emerging markets reliant on external flows.
Source: https://www.bangkokpost.com/business/2280531/the-commodity-price-challenge