The decade-long dream run of low inflation for emerging economies in Asia is about to end and there will be consequences, warned Moody’s Analytics, the research arm of the rating agency Moody’s Investor Services Ltd.
“Starting with a slow creep and swirling into a Category 5 hurricane, inflation will make itself felt across the region, landing later than in the rest of the emerging world and proving only slightly less disruptive,” Moody’s said in a report.
For more than a decade, consumer price inflation in emerging Asian economies such as Thailand, Vietnam, Malaysia, the Philippines and China have remained low despite short episodes of sharp increase in the prices of commodities globally.
“This is partly due to gains on the supply side of the economy, with growth in labour productivity helping the region absorb the pressures of a rising consumer class,” the report said. Local subsidies given by governments also helped offset the impact of global price hike.
Most of these economies have current account surpluses and export more than they import. The outcome of this is higher domestic savings which find its way into offshore markets.
All this has changed now. Moody’s believes that the rise in inflation is mostly demand-led for emerging Asian economies. Excluding China, Asian countries have reported a stellar rebound in their economic growth in the first six months of 2022. This means demand impulses have come back with force, showing up in price increases. Needless to say, supply hasn’t kept pace which has accelerated the price increases.
“Now that the reopening process in India and South East Asia is nearly complete, the supply shock from the invasion of Ukraine and lingering supply-chain bottlenecks have crashed into demand,” the report noted. The far reaching effects of the Russia-Ukraine war on food, oil, metals, engineering goods and others have begun to show across economies.
The rising inflation pressure has forced the central banks across Asia spring into action with rate hikes. Most have effected one or more hikes so far but Vietnam, Thailand and Indonesia are yet to bite the bullet.
Moody’s pointed out that unlike other economies such as those in Latin America, emerging Asian countries are underbanked. This blunts the impact of the rate hikes by central banks on the economy somewhat. It also means that the central banks will see the effects after a long lag and therefore need to be patient.
The casualty of rate hikes would be the economic growth, Moody’s said. It expects the Asian economies to see a deceleration in economic growth this year. The gains from economic growth would be limited in terms of employment and income generation, the report said.