Russia-Ukraine war – The extraordinary Russian incursion into Ukraine is endangering Southeast Asia’s post-COVID economic recovery. In addition to the conflict’s effect on Ukrainian athletes, citizen, celebrities, the conflict also spurs up commodity prices, especially oil, nickel, wheat, and corn, which are all crucial sources of income for countries such as China and Bangladesh. Thailand, Vietnam, and Singapore are particularly concerned because they import many of these goods.
Over the past few years, WTI and Brent crude oil prices have nearly doubled, while the Thomson Reuters/Core Commodity index has increased by 33 percent since 2022. Commodity price hikes are rippling through to local prices, affecting producers and consumers.
For example, February's producer and consumer price inflation in Thailand was 11.44% and 5.73%, up from 8.7% and 3.23%, respectively, in January. Although the impact of rising oil costs has yet to be seen in general consumer price inflation in Vietnam, Malaysia, and Indonesia, where rates are currently around 2.2–2.6 percent, it is being felt in subsets of consumer prices, such as transport, housing, electricity, gas, and other fuels. In Vietnam, the petrol scarcity is leaving some stations with no gas to sell, and it's claimed that businesses are stockpiling gasoline in anticipation of price rises.
The price rises in the agricultural sector have had various consequences worldwide. This hike in price is only to be expected since multiple variables, including the speed of their economic recovery and demand response, influence flow-on effects. Energy subsidies, for example, could assist in alleviating the impact of soaring oil costs on inflation, especially in Indonesia. According to the IEA’s Fossil Fuel Subsidies Database, Indonesian fuel subsidies amounted to 0.6 percent of GDP in 2020 contrast to 0.1 percent in Thailand and Vietnam.
Oil and energy consumption in Indonesia, Malaysia, and the Philippines is low, which might help to minimize the inflationary effects of an oil price rise. In Singapore and Thailand, high petrol and energy usage is expected to result in the oil price hike affecting domestic costs more quickly.
Indonesia, Malaysia, the Philippines, and Vietnam are expected to suffer more than others due to their high per capita consumption of essential foods like wheat. However, price controls and direct government subsidies for individuals will assist in reducing the impact of food price increases by limiting firms’ abilities to pass these expenses on to customers.
Due to economic sanctions on Russia and slow progress in Ukraine’s peace negotiations, high commodity prices are anticipated. Fright of ‘stagflation’ in the region has been reignited, fueled by rising commodity costs and sluggish consumer demand. While the epidemic has delayed efforts to decrease poverty and increase inequality, continued deterioration in purchasing power among low- and middle-income people raises concerns about attaining a smooth and sustained economic recovery in the area.
In the near-term, government safety nets intended to protect low-income people are required for a successful and prolonged recovery. Food controls, gasoline subsidies, and price caps on ex-refinery and retail prices should all be included in this aid.
As net oil suppliers, Indonesia and Malaysia are in a stronger position than other countries because oil price hikes will assist with the economic recession caused by the pandemic. To allay concerns about public-debt distress, governments throughout Southeast Asia should put forth detailed plans to generate solid income after demonstrating improved indications of economic growth. Singapore, for example, intends to raise the Goods and Services Tax from 2023 and extend it to a broader range of items, including imported low-cost products and online sales by overseas suppliers.
In Thailand, where signs of economic recovery are lagging behind the rest of the region and supply shocks continue to affect costs and inflation expectations, monetary policy should be cautious. Exchange rates should be closely monitored to prevent high import costs and assist with exports, which have been the primary engine of economic recovery in the area thus far. To a certain extent, it may aid in the reduction of import difficulties, which will eventually boost companies’ export competence in the region.
The governments of Southeast Asian countries, particularly oil-importing nations, may attempt to secure alternative energy sources, such as Venezuela and Saudi Arabia. Still, they should proceed with caution in doing so. They might also assist in pushing OPEC and IEA member nations to increase production to relieve the strain on prices. Working with various sectors to improve energy efficiency may also help control rising domestic costs. Diversifying energy sources, significantly greener energy, is a more long-term solution to volatile oil costs.