By Swati Pandey
A triumvirate of high oil prices, a surging dollar and geopolitical instability are set to weigh on India and Indonesia among Asia’s emerging markets, while energy exporter Malaysia may prove a rare beneficiary.
Brent crude prices have jumped almost 20 per cent in the past three months and Bloomberg Economics estimates they could soar to $150 a barrel, from about $90 now, if the Middle East conflict widens to include Iran. The Islamic Republic supplies arms and cash to Hamas, which the US and European Union designate as a terrorist group, and backs the Hezbollah militia in Lebanon.
“If higher oil prices persist for a prolonged period, we see India, Thailand, the Philippines, Indonesia more vulnerable to terms of trade deterioration,” said Lavanya Venkateswaran, a senior economist at Oversea-Chinese Banking Corp. Ltd. “Moreover, as ‘twin deficit’ economies — current account and fiscal deficits — they may be more vulnerable to capital outflows.”
Compounding the problem, US Treasury yields have soared on concerns that higher oil prices will revive inflation pressures. That’s another headwind for nations running high budget deficits as they’ll likely struggle to raise funds in global markets, Garcia Herrero added.
The chart above shows emerging Asian bonds have become less attractive for investors — the premiums a borrower pays to own Indian or Indonesian bonds against US debt, for example, have hit the lowest level since at least the 2008-09 global financial crisis.
“The other low-yielding currencies not only do not have these supportive factors, they also have certain individual shortcomings,” the HSBC strategists wrote, pointing to election uncertainty for the Taiwanese dollar, deteriorating fiscal metrics for the Thai Baht and overvaluation for the Singapore dollar.
One country that stands to benefit from rising oil prices is Malaysia, in terms of both growth and the nation’s fiscal position, economists said.
“We see increased export duties, petroleum income taxes, and dividends from the state-owned Petronas to be adding to the fiscal revenue,” said Bum Ki Son, Singapore-based regional economist at Barclays Plc. “For Indonesia, we think the fiscal position is likely to deteriorate.”
“The fact that Indian data has been so strong — latest PMI was the best in Asia — does help India,” said Garcia Herrero.