High commodity prices a headwind for APAC sovereigns

By ASILA JALIL / Pic BLOOMBERG

HIGH commodity prices as a result of the Russia-Ukraine conflict is likely to pose a challenge for the Asia Pacific (APAC) region. 

According to Fitch Ratings Inc, credit buffers among APAC economies to withstand risks from high commodity prices are generally strong but it had been eroded during the Covid-19 pandemic. 

“The impact of energy-market turmoil following the Russia/Ukraine conflict, with spikes in oil, natural gas and coal prices, differs significantly per sovereign, but on the whole is likely to be a headwind for the region,” Fitch stated in a note. 

It added most APAC sovereigns are net energy importers thus implying downside external risks. 

Strong external positions, with current account surpluses or modest deficits from the weak economic activity from the pandemic, would provide a buffer for much of the region. 

“Frontier markets, such as Sri Lanka, Pakistan and Maldives, are likely to face more pressures, given already challenging external finances. Rising energy prices are likely to buoy prospects in Mongolia (coal), Australia (coal and natural gas), and Malaysia (natural gas and oil),” it stated. 

The increase in commodity prices is expected to push up inflation across the region. The firm noted inflation in APAC has generally been more subdued than in much of the rest of the world. 

This would in turn give central banks in the region some scope for accommodating policy settings. 

“Policy tightening may be brought forward, especially if commodity-price moves were to speed up US Federal Reserve tightening, but we generally expect tightening in APAC to be relatively more gradual,” it said. 

It added the extent of inflation passthrough from commodity prices hinges on how much policymakers subsidise higher prices. 

Sovereigns with a history of relatively stable administered cuts such as Malaysia, Pakistan, Indonesia and India could see a rise in implicit or explicit subsidies. 

Rising subsidies will also add to post-pandemic fiscal consolidation risks, in the context of fiscal deficits and debt which are already high in many sovereigns, Fitch stated. 

It said growing tensions have contributed to a rise in global risk aversion, which will make financing conditions in APAC more challenging particularly in frontier markets and emerging markets reliant on external flows, such as Indonesia. 

“In contrast, China has seen inflows recently, and Japan could experience safe-haven inflows from domestic investors,” it added.