Pivot to Asia is our monthly newsletter focusing on the most significant issues and trends in Asia. Today, we turn the spotlight on the effects of the rise of commodity prices in the region.
The spike in commodity prices does not affect all countries in Asia equally. The significant discrepancies in their development paths imply widely different impacts across the region, with winners (net exporters), and losers (net importers). The poorest countries in South Asia will be among the ones most affected, with food security as a major threat.
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Why it matters
- According to the IMF, emerging and developing Asia is going to be the fastest-growing region in the world in 2022, with an expected 5.4% GDP growth. Any major change to this economic performance will severely affect international growth, as the region amounts to one third of the world’s GDP in PPP. India, the Philippines, and Bangladesh rank high in the IMF’s list, respectively with 8.2%, 6.5%, and 6.4%; while the Economist Intelligence Unit predicts remarkable performance for Vietnam as well (6.8%). The region is also projected to record the highest growth among world regions in 2023 at 5.6%.
- Some countries might benefit from rising prices. Malaysia and Indonesia – which have already gained a strong current account surplus since the pandemic – are among those with better export prospects. However, concerns for domestic food security have led the Indonesian government to impose a ban on the export of crude and refined palm oil. Jakarta is the world’s biggest producer, with a 60% market share, followed by Malaysia (25%). Palm oil is a key product among vegetable oils, because it is the most valuable alternative to sunflower oil. Due to the Ukraine war, the latter is now affected by a massive shortage, as 80% is produced in Ukraine and Russia. After Europe, Asia is least dependent region worldwide on commodity export, a condition that occurs when over 60% of a country’s total merchandise exports are composed of commodities. However, there are still several highly dependent countries, including Mongolia (97.9%), Papua New Guinea (96.1%), Laos (70.7%), and Myanmar (61.1%) that fit this definition, while Indonesia falls slightly short at 55.6%.
- Food and energy security are the primary concerns for vulnerable countries. Sri Lanka is in the middle of a political and economic crisis triggered by already existing structural issues - such as high foreign debt and poorly managed agricultural policies - and further accelerated by the increase of crude oil prices (20% of its overall inbound shipments in December 2021). Bangladesh is not yet experiencing such backlash, though it might be second in line as it imports 95% of its edible oil (whose price has more than doubled since the start of the war). Food is a concern for Pakistan as well, as 80% of its cereal imports come from both Russia and Ukraine.
Our take
If compared to Europe, Asia is obviously less vulnerable to the economic consequences of the Ukraine war. However, the rise in commodity prices (further aggravated by the conflict) will have a mixed impact on the region’s emerging and developing countries. The challenges for the region might outweigh the benefits. So long as the war lasts and the global economic repercussions continue to be felt, Washington’s pressure on Asian economies to take sides on the Ukraine war will be sidelined by their need to mitigate the conflict’s economic spillover. Biden’s call on democracies to stand together against autocracies will be challenged by these short-term needs. Economy will be key in shaping Asia’s long-term strategic landscape, and will inevitably take its toll on both the US and China’s ambitions to increase their regional influence. Whichever actor will succeed at helping Asian economies further recover from the pandemic as well as from the Ukrainian conflict, will likely gain greater trust from local partners and strengthen its regional influence. Building a stronger economic relationship with Asia will be at the core of Biden's agenda this month. In the upcoming weeks, he will host ASEAN countries in Washington (May 12-13), and will then travel to South Korea and Japan from May 20-24 to promote his recently announced Indo-Pacific Economic Framework, after the Regional Comprehensive Economic Partnership came into force back in January.
China’s Covid policy: a major source of uncertainty
After a two-year-long track-record of containing the spread of Covid-19 in China, the Omicron variant is severely affecting the country’s pandemic strategy and economy. Since December, major cities like Xi’an, Shenzhen, and Shanghai – with Beijing probably next in line – all had to impose lockdowns. According to online media reports, these measures appear to be increasingly losing public support and are not only affecting China’s economy — with halts to production and lower consumption rates — but are also contributing to global inflation due to supply chains disruption. In March – before the current lockdown in Shanghai – China’s retail already dropped by 3.5%, as stated by the last available data, and the figure for April is set to be worse. At the same time, because of Covid, logistic operations are delayed due to restrictions imposed on the workers for entering and exiting the area, which resulted in up to 700 ships waiting outside the congested port of Shanghai. The main concern is that the government does not seem to be willing to review its strategy, casting doubt over the duration of the current lockdown and, therefore, over its economic impact. In particular, China’s leadership does not want to review one of its major decisions – the Zero-Covid strategy, a matter of national pride before the current downturn – in the months leading up to the crucial 20th Party Congress in November, which will confirm Xi Jinping’s leadership. However, not reaching the annual GDP growth target set in March at 5.5%, would damage the government’s image and in the coming weeks Xi Jinping will have to face the contradictions between competing interests: stopping Covid and reducing its economic cost.
Experts' Views
What to expect from inflation?
The Korean view | "Asia remains a region with relatively stable prices. In the World Economic Outlook published in April, the IMF projects 3.2 percent of CPI inflation for this year in Asia against the Eurozone’s 5.3 percent and the US’ 7.7 percent. An obvious contributor to Asia’s low inflation is the two largest economies of the region, Japan and China, whose inflation has long been extremely low. Heavily trading with these countries, Asian economies are less affected by global inflation than other regions. Less aggressive monetary and fiscal policy responses vis-à-vis the pandemic compared to those in Washington have been another important factor. Unlike the U.S., there are no symptoms of overheating in Asia. Additionally. Compared to the Eurozone, Asia has been affected to a lesser degree by the energy price hikes caused by the Ukraine war.”
Dongchul CHO, KDI School of Public Policy and Management
The French view | "Two major factors contribute to rising inflation in the Asia-Pacific region (as well as the rest of the world): the invasion of Ukraine and the ongoing Omicron outbreaks in China. The former has led to a surge in global commodity prices. This creates inflationary pressures on the Asia-Pacific region, which is on aggregate a net importer of commodities (with an overall trade deficit of about 3% of GDP when accounting for agri-food, energy, and metals), and where food prices constitute a large share of consumer inflation baskets for many emerging economies (e.g., around 50% in India). On top of this, the ongoing partial — or full — lockdowns across several Chinese cities are prolonging global supply chain bottlenecks, which is likely to keep the cost of trade and some critical inputs (e.g., for the electronics and automotive sectors) at elevated levels. We expect Asian-Pacific inflation at 3.1% in 2022 and 2.6% in 2023 following a 1.6% rate in 2021."
The impact of rising commodity prices on Asia’s energy markets
"Asia is a major energy-importing region. Following Western sanctions and energy boycotts against Russia, Europeans are now seeking alternative energy sources, putting them in competition against Asian importers. In particular, as Europe looks to alternative sources for gas imports, Asian economies will struggle to replace coal — which remains a primary energy source in the region due to its affordability and availability — with gas, which is the least polluting fossil fuel of all. The war in Ukraine has therefore complicated Asia’s quest for sustainable energy security and will inevitably set back the low carbon energy transition plans in the region. Albeit promising, the transition to renewable energy will take time, with its scalability contingent upon access to new funds, technological advancement, and human capital growth. The international scramble to secure global energy supplies marks a new era for energy geopolitics. In this regard, Asia is likely to experience increased energy insecurity ahead. This will cause massive economic, political, and social strains and threaten the sustainable development of Asian countries in the long run."
Christopher Len, National University of Singapore
What and Where
Busy Station in India
India has become a hot spot among the world’s political leaders. After Boris Johnson’s visit to reinforce London’s defense partnership with India, EU Commission President Ursula von der Leyen’s visit followed. The rush to meet with India’s Prime Minister, Narendra Modi, is a response to the tense international climate that has followed the Ukraine war. India has refrained from criticizing Russia’s invasion, mainly due to their long-standing friendship and its dependence on Russian weapons - amounting to 46% of India’s total arms imports between 2017-21. Renewed Western interest in re-launching relations with India stems from the desire to counterbalance India-Russia relations and keep the world’s largest democracy aligned with the West. As von der Leyen recently put it, a solid partnership with India will be a top priority for Europe and she emphasized how an alliance between China and Russia could harm both Europe and India. The EU is willing to engage India with viable alternatives to Russia, offering to sell New Delhi weapons and establishing an EU-India Trade and Technology Council, despite Modi’s reluctance to turn the back on Russia and the decision to increase imports of Russian oil, his visits to Europe between 2-4 of May demonstrate India’s willingness to deepen cooperation with Europe. Ultimately, India needs international partners that can help balance China’s influence in the Asia-Pacific, and with the risk of Russia drifting closer to China, New Delhi cannot afford to be isolated from the West. India understands the benefits of an increased engagement with Europe, but it fears alienating Putin: it cannot afford to have Russia get closer to China, lose its major weapon supplier, and disavow a close ally that in the past has used its veto power at the UN to protect Indian interests. As such, Modi will likely choose to keep walking the fine line between Moscow and the West.
Hong Kong: New Chief, Little Change
On the 8th of May, the Hong Kong elections for the leading local administrative position – the Chief Executive – will further cement Chinese control over the former British colony. After the imposition of the Hong Kong National Security Law in 2020, many pro-democracy parties have been secluded and only “patriots” approved by Beijing can now hold a position of power in the political system. This year’s only candidate is indeed one of the so-called “patriots”: John Lee, the Chief Secretary of the previous administration, favored by Beijing, is the only contender. In April, he won the support of half of the the Election Committee, ultimately making him the de facto Chief Executive of Hong Kong. A softer policy towards pro-democracy activists and supporters under Lee’s term is unlikely. With his experience in the police and the pro-China faction of the Committee’s strong support, Lee’s candidacy has been interpreted as a sign that the Communist Party in Beijing has no intention to abandon its uncompromising stance against the political opposition in the island.
The China-Solomon Islands Security Pact: Reshaping the Balance in the Pacific?
The Solomon Islands are a point of contention between the PRC and the West for the control of the Pacific region.
In mid-April, China announced the signing of a security pact with the Solomon Islands, which is bound to upset the current security order in the Asia-Pacific. In March, an unverified draft copy of the agreement was leaked on the internet: it included provisions that would allow Chinese military personnel to be moved to the Solomon Islands if requested by the local government. The Solomon Islands’ Prime Minister, Manasseh Sogavare tried to placate his neighbours by assuring he has no intention of transforming the country in a military base for China. In response to China’s rising engagement with the country, the US National Security Council coordinator for Indo-Pacific affairs, Kurt Campbell, and other senior US officials paid a visit to the local capital, Honiara. During the meeting, the US delegation expressed its worry over the deal with China and stated it would not rule out military action in response to the establishment of a permanent Chinese military presence in the insular state. The visit comes after a long period during which the US had left the South-Pacific island unattended, as exemplified by the lack of a US embassy there in the last 29 years. Australia in particular has voiced concern over the security pact: if the content of the draft is true, Chinese forces could potentially come remarkably close to the Australian coast. As the pact remains secret, the only certainty is that Beijing is likely to deepen its presence across the Pacific.
In Asia, Covid Has Not Disappeared, but Countries Are Handling It Differently
While China is battling its largest wave of Covid-19 cases since the start of the pandemic, other countries across the continent are handling the situation differently.
Countries in the Asia-Pacific region that are heavily reliant on tourism, such as Thailand and Malaysia, are starting to relax their border restrictions, opening to foreigners after years of strict measures to contain Covid-19. In the past months these nations have not been spared from the Omicron variant, but they seem to have now opted to live with the virus. An example of such is Vietnam which, despite a considerable number of cases in the last weeks, has recently removed the mandatory quarantine period for foreigners: now, travelers only need a negative test upon entry.
Taiwan is experiencing a high number of cases proportionate to its small population, after having recently abandoned a “zero-covid” strategy to contain the spread of the virus. Similarly, Australia and Singapore have decided to abandon the “zero covid” approach, deeming the pandemic situation under control thanks to vaccines and medications. This leaves China – and subsequently Hong Kong – as the two major economies still clinging to harsh lockdowns and social distancing measures.
Looking ahead
At a time of high economic uncertainty, having sufficient space for expansionary fiscal policies could be crucial for growth prospects.According to the World Bank, the exposure of Asian economies to governments’ gross debt is mainly sustainable. Indeed, their exposure level can be labeled as in the mid-to-low range, given that Malaysia tops the regional ranking in terms of GDP/debt ratio with only 64%, while, in comparison, the EU is close to 100%. However, the situation worsened in 2020 in comparison to the 2015-2019 average, with a change between +8% (Malaysia) and +17% (the Philippines). China may have improved its debt-to-GDP ratio (-5), but its leaders should be concerned about the country’s corporate debt-to-GDP ratio: the highest in region, followed by Vietnam. This figure weakens China’s capability to adopt a strong fiscal stimulus as it did in 2008 to overcome the negative effect of the global financial crisis.
What We're Reading
- Zero Covid Policy in China: “China’s Leadership is Prisoner of its own Narrative”
- Commodity market outlook in Asia: The Impact of the War in Ukraine on Commodity Markets
- Asia after the war: The outlook for Asia following the Russian invasion of Ukraine
- A new economic paradigm for China?: The Age of Slow Growth in China
- G20 at the time of war: The Challenges Facing Indonesia’s G20 Presidency
