A triumvirate from high oil pricesA rising dollar and geopolitical instability are expected to weigh on India and Indonesia in Asia’s emerging markets, while energy exporter Malaysia may prove a rare beneficiary.
Economists are concerned about the impact on Asia’s development from an expansion of the war between Israel and Hamas, with policymakers struggling to assess the impact on oil supplies and the size of the potential impact on growth. The rise in both the dollar and long-term government bond yields increases risks for economies with high current account deficits.
Brent crude prices have risen nearly 20% in the past three months and Bloomberg Economics estimates they could rise to $150 a barrel from around $90 now if the Middle East conflict spreads to Iran. The Islamic Republic supplies weapons and cash to Hamas, which is designated a terrorist group by the US and the European Union, and supports the Hezbollah militia in Lebanon.
The conflict between Israel and Hamas comes on top of Russia’s long war against Ukraine and simmering superpower tensions between the US and China. The following charts show countries that are more exposed to prolonged higher dollar and oil prices.
“If higher oil prices persist for longer, we see India, Thailand, the Philippines and Indonesia more vulnerable to deterioration in trade conditions,” said Lavanya Venkateswaran, a senior economist at Oversea-Chinese Banking Corp Ltd. economies with twin deficits – current account deficits and budget deficits – may be more vulnerable to capital outflows.”
Alicia Garcia Herrero of French investment bank Natixis SA said high foreign debt positions mean Sri Lanka and Pakistan are most at risk. Indonesia and India are also vulnerable “because they often run current account deficits and require external financing,” she said.
Compounding the problem, U.S. Treasury yields have soared on concerns that higher oil prices will revive inflationary pressures. That’s another headwind for countries with high budget deficits as they are likely to struggle to raise funds in global markets, Garcia Herrero added.
The graph above shows that bonds from emerging Asian countries have become less attractive to investors; the premiums a borrower pays to own Indian or Indonesian bonds over U.S. debt, for example, have reached the lowest levels since at least the 2008-2009 global financial crisis.
Strategists at HSBC Holdings Plc say they prefer the Chinese renminbi and Korean won to low-yielding Asian currencies. They highlight Beijing’s tight focus on refining fiscal policy and recent real estate market moves, as well as the Bank of Korea’s consistent currency sales and the country’s potential inclusion in a global bond index next year.
“Not only do the other low-yielding currencies lack these supporting factors, they also have certain individual shortcomings,” the HSBC strategists wrote, pointing to election uncertainty for the Taiwan dollar, deteriorating fiscal figures for the Thai baht and overvaluation for the Singapore dollar. dollars.
“Among the higher yielding currencies, we have a slight preference for the Philippine peso and the Indian rupee over the Indonesian rupiah,” they said.
One country that could benefit from rising oil prices is Malaysia, both in terms of growth and the country’s fiscal position, economists said.
“We see higher export duties, oil income taxes and dividends from state-owned Petronas adding to tax revenues,” said Bum Ki Son, Singapore-based regional economist at Barclays Plc. “For Indonesia, we think the fiscal position is likely to deteriorate.”
Economists see some positive developments for India, despite the higher dollar and higher oil prices. Natixis’ Garcia Herrero pointed to strong macroeconomic data that makes the country’s assets attractive despite the headwinds.
“The fact that the Indian data are so strong – the last PMI was the best in Asia – helps India,” says Garcia Herrero.
Economists are concerned about the impact on Asia’s development from an expansion of the war between Israel and Hamas, with policymakers struggling to assess the impact on oil supplies and the size of the potential impact on growth. The rise in both the dollar and long-term government bond yields increases risks for economies with high current account deficits.
Brent crude prices have risen nearly 20% in the past three months and Bloomberg Economics estimates they could rise to $150 a barrel from around $90 now if the Middle East conflict spreads to Iran. The Islamic Republic supplies weapons and cash to Hamas, which is designated a terrorist group by the US and the European Union, and supports the Hezbollah militia in Lebanon.
The conflict between Israel and Hamas comes on top of Russia’s long war against Ukraine and simmering superpower tensions between the US and China. The following charts show countries that are more exposed to prolonged higher dollar and oil prices.
“If higher oil prices persist for longer, we see India, Thailand, the Philippines and Indonesia more vulnerable to deterioration in trade conditions,” said Lavanya Venkateswaran, a senior economist at Oversea-Chinese Banking Corp Ltd. economies with twin deficits – current account deficits and budget deficits – may be more vulnerable to capital outflows.”
Alicia Garcia Herrero of French investment bank Natixis SA said high foreign debt positions mean Sri Lanka and Pakistan are most at risk. Indonesia and India are also vulnerable “because they often run current account deficits and require external financing,” she said.
Compounding the problem, U.S. Treasury yields have soared on concerns that higher oil prices will revive inflationary pressures. That’s another headwind for countries with high budget deficits as they are likely to struggle to raise funds in global markets, Garcia Herrero added.
The graph above shows that bonds from emerging Asian countries have become less attractive to investors; the premiums a borrower pays to own Indian or Indonesian bonds over U.S. debt, for example, have reached the lowest levels since at least the 2008-2009 global financial crisis.
Strategists at HSBC Holdings Plc say they prefer the Chinese renminbi and Korean won to low-yielding Asian currencies. They highlight Beijing’s tight focus on refining fiscal policy and recent real estate market moves, as well as the Bank of Korea’s consistent currency sales and the country’s potential inclusion in a global bond index next year.
“Not only do the other low-yielding currencies lack these supporting factors, they also have certain individual shortcomings,” the HSBC strategists wrote, pointing to election uncertainty for the Taiwan dollar, deteriorating fiscal figures for the Thai baht and overvaluation for the Singapore dollar. dollars.
“Among the higher yielding currencies, we have a slight preference for the Philippine peso and the Indian rupee over the Indonesian rupiah,” they said.
One country that could benefit from rising oil prices is Malaysia, both in terms of growth and the country’s fiscal position, economists said.
“We see higher export duties, oil income taxes and dividends from state-owned Petronas adding to tax revenues,” said Bum Ki Son, Singapore-based regional economist at Barclays Plc. “For Indonesia, we think the fiscal position is likely to deteriorate.”
Economists see some positive developments for India, despite the higher dollar and higher oil prices. Natixis’ Garcia Herrero pointed to strong macroeconomic data that makes the country’s assets attractive despite the headwinds.
“The fact that the Indian data are so strong – the last PMI was the best in Asia – helps India,” says Garcia Herrero.
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