Conflict seen reversing SE Asia gains

Troubles in Europe to boost prices for key commodities, crimp spending, observers say

The Ukraine-Russia conflict is likely to upend Southeast Asia's economic recovery this year, analysts said, as global disruptions in the supply of oil and grains are expected to boost prices and dampen consumption.

While the region is not a major trade partner of Ukraine and Russia, analysts note that Southeast Asian countries remain net importers of oil, wheat and corn. Prices of these commodities have been rising in the past few days as Ukraine and Russia are major commodity exporters.

Ukraine is one of the world's biggest exporters of wheat, corn and sunflower oil, while Russia is a leading exporter of oil, wheat and natural gas.

With supply tightening, importers have to scramble for other sources, spiking prices. Prices of Brent crude oil, an international benchmark, surged to a seven-year high above $109 a barrel on Wednesday as the conflict intensified.

Nicholas Antonio Mapa, a senior economist at ING bank, said faster inflation growth will limit the gains made by Southeast Asian economies that "are attempting to break out after the COVID-19 slump".

"Central banks will likely resort to rate hikes to protect their vulnerable currencies, which in turn could sap some capital formation or investment momentum," Mapa said.

Southeast Asian economies, once among the most dynamic in the world, have started recovering in the past few months thanks to COVID-19 vaccination programs that allowed them to gradually reopen their economies.

Malaysia's GDP grew 3.1 percent in 2021－a turnaround from the 5.6 percent contraction in 2020. Officials of the region's third-biggest economy are projecting growth of 5.5 to 6.5 percent this year.

Wan Suhaimie Wan Mohd Saidie, head of economic research at the Kuala Lumpur-based Kenanga Investment Bank, said the Ukraine conflict might hurt "recovery momentum".

"If oil prices as well as (prices of) other soft commodities like wheat or corn remain high it would definitely impact inflation because Malaysia imports wheat and corn mostly for animal feed apart from human consumption," he said.

Khor Yu Leng, a regional economist at consultancy Segi Enam Advisors in Singapore, said that while higher crude oil prices might boost Malaysia's export revenues, those gains will be wiped out as the government has to spend more for fuel and food subsidies.

Khor said fertilizer prices might go up, boosting food prices further.

"Fertilizers are a major (farm input) and (prices for them have been) going up too, and many farmers globally have been hesitant to buy even before the conflict erupted. Russia has market power here. It is a major (fertilizer) exporter," she said.

Thailand's GDP rose 1.6 percent in 2021 and Southeast Asia's second-biggest economy is projected to expand 3.5 to 4.5 percent this year thanks to higher exports and the return of international tourists.

But Kobsidthi Silpachai, head of capital markets research at Bangkok-based Kasikornbank, said that as the conflict in Europe continues, the global tourism recovery will be further delayed as consumers are likely to be more cautious about their spending.

"This increases the probability of the Thai economy falling back into recession," he said, alluding to the 6.1 percent contraction in 2020.

Kobsidthi said Thailand is also susceptible to the rise in oil prices and "this kind of inflation cannot be solved by monetary policy and presents a great dilemma to central banks including the Bank of Thailand".

Ruben Carlo Asuncion, chief economist at Union Bank of the Philippines, said the biggest repercussion of the Ukraine-Russia conflict "is on the inflation side, particularly on higher oil prices. I think that it will spill over into more cost-push inflation for the Philippine economy."

He said the Philippines is a net oil importer and its industries are dependent on imported oil.

"If the conflict drags on, Philippine economic (growth) may stall and any upbeat economic growth recovery may be upended under a worst-case scenario," he said.