APAC Chartbook: The Power of Prices

Dhaka August 17 2022 :

Moody’s Analytics has published an analysis titled “APAC Outlook: Surviving the Year’s Rocky and Uneven Start”.

KEY MESSAGES

• The Asia-Pacific economies have had a rocky and uneven start to 2022.
• The greatest risks in the near term are rising inflation and uncertain demand for goods and services in China.
• Regional currencies are generally holding up well against their peers in light of strong dollar demand.

South and Southeast Asia face the greatest risk from a surprise in inflation. This could slow local demand for goods and services, including housing. Japan, South Korea and Taiwan are more highly exposed to further supply-chain disruptions from China for electronics and components. A decline in commodity prices faster than expected would dampen the economies of Australia, Indonesia and Malaysia.

From inflation to exchange rates, energy prices are leaving a mark on the Asia-Pacific region.

Russia’s invasion of Ukraine pushed up commodity prices around the world, hitting household budgets and adding to cost-of-living pressures.

Some heat has since come out of oil prices, but other markets remain stubbornly high.

Commodity exporters in the Asia-Pacific region are reaping the rewards from higher prices.

Slower interest rate hikes and higher import costs are weakening key currencies.

Russia’s invasion of Ukraine sent shock waves through global energy markets. Initial price spikes turned into lingering price rises as the global community imposed sanctions on Russia’s key exports. Brent crude prices peaked above $120 a barrel in June, while European natural gas prices today are more than three times higher than what they were in 2021.

For the Asia-Pacific region, the impacts of higher prices have been varied. For net energy importers such as Thailand, Japan, South Korea and Singapore, household energy bills have risen sharply. But for the region’s key energy exporters, Indonesia, Malaysia and Australia, households have been more sheltered.Some of the heat has come out of oil markets in recent weeks.

Brent crude returned below $100 a barrel in August, with the drop gradually flowing through to lower prices at the pump. This trend will continue; we expect crude prices to fall to almost $70 a barrel by the end of next year.

For the  Asia Pacific Accreditation Cooperation (APAC) region’s big oil importers, notably Singapore and Hong Kong, this will ease pinching price pressures.

But coal and natural gas prices remain stubbornly high. Any sign of a correction quickly unwound before lower prices hit consumers.

The APAC region’s big LNG importers, including Japan, South Korea, Taiwan and China, are particularly vulnerable to sticky prices. Likewise, with coal prices elevated, big importers, including India, Pakistan and Vietnam, are paying more for what they need.

Windfall for APAC exporters

Although higher commodity prices are hurting households and adding to global inflation pressures, some APAC exporters are benefiting from the price premium. Indonesia and Malaysia are the region’s big oil exporters.
Higher crude prices have given each an export price boost. Likewise, Australia is in the midst of an export boom, with elevated coal and LNG prices pushing its terms of trade to a record high. That’s not only helping Australian firms tied to mining, but also government revenue through company profit tax receipts and royalties.

Conversely, energy importers such as South Korea and Japan have seen their import prices jump far more than their exports—resulting in a collapse in their terms of trade.

What this means for the yen

Higher import costs are putting downward pressure on the region’s key currencies, exacerbating weakness from mounting interest rate differentials with the U.S. This is particularly true for Japan. The value of the yen has
plummeted almost 20% against the greenback compared with pre-pandemic levels. Likewise, the Thai baht has weakened dramatically this year, with falls also seen in the Philippine peso, South Korean won and Indian rupee.

Weaker exchange rates lift the cost of buying from the rest of the world, adding to inflation pressures. With imported inflation rising, we could see the hands of central banks forced and an acceleration of interest rate hikes.
The aussie and kiwi have held relatively firm, both supported by a series of meaningful interest rate hikes and a boost to the terms of trade from elevated export prices.

Quantitative easing’s less fun cousin

Speaking of Australia and New Zealand, both countries embarked on massive quantitative easing campaigns through the pandemic. In essence, their central banks bought up big in government bonds, lowering longer-term interest rates and incentivising investment. In doing so, their asset holdings rose almost threefold over the past 2½ years.

At some point, this will have to be unwound through a period of quantitative tightening. But don’t expect that to happen too quickly. The Reserve Bank of Australia announced in its May meeting that it did not plan to actively sell its bond holdings but would instead wait for its holdings to mature. Likewise, the Reserve Bank of New Zealand is playing it slow and steady, only starting to sell its bond holdings in July under a five-year exit strategy.

COMMENTARY by Harry Murphy Cruise & Stefan Angrick on 15 August, 2022 : Moody’s Analytics

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